XOMED SURGICAL PRODUCTS INC, S-1/A, 1996-09-13

XOMED SURGICAL PRODUCTS INC
S-1/A, 1996-09-13
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1996

REGISTRATION NO. 333-10515

---------------

AMENDMENT NO.1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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XOMED SURGICAL PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3841 06-1393528
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------

6743 SOUTHPOINT DRIVE NORTH
JACKSONVILLE, FLORIDA 32216
(904) 296-9600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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JAMES T. TREACE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
XOMED SURGICAL PRODUCTS, INC.
6743 SOUTHPOINT DRIVE NORTH
JACKSONVILLE, FLORIDA 32216
(904) 296-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

---------------
Copies to:
MICHAEL A. SCHWARTZ, ESQ. BRUCE K. DALLAS, ESQ.
WILLKIE FARR & GALLAGHER DAVIS POLK & WARDWELL
ONE CITICORP CENTER 450 LEXINGTON AVENUE
153 EAST 53RD STREET NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10022 (212) 450-4000
(212) 821-8000 ---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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- -------------------------------------------------------------------------------
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

SEPTEMBER 13, 1996

2,500,000 Shares

[Logo]

XOMED SURGICAL PRODUCTS, INC.

Common Stock

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All of the shares of Common Stock offered hereby are being sold by Xomed
Surgical Products, Inc. ("Xomed" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$19.00 and $21.00 per share. See "Underwriting" for the factors to be
considered in determining the initial public offering price.

-----------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," PAGE 7.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(2).................................. $ $ $
</TABLE>
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(1) Before deducting expenses of the offering estimated at $750,000.

(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."

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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.

Alex. Brown & Sons UBS Securities
INCORPORATED

THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>

[COLOR PICTURES OF COMPANY'S MICROENDOSCOPY PRODUCTS SURROUNDING A MAN'S
HEAD AND NECK WITH CAPTION WHICH READS "XOMED ESTIMATES THAT ENT SURGEONS
PERFORMED OVER THREE MILLION PROCEDURES IN THE U.S. IN 1995. XOMED MARKETS OVER
4,000 MICROSURGICAL PRODUCTS WORLDWIDE ADDRESSING SURGICAL PROCEDURES IN THE
THREE MAJOR SUBSPECIALTIES OF SINUS AND RHINOLOGY, HEAD & NECK AND OTOLOGY.
APPROXIMATELY 86% OF XOMED'S REVENUES IN THE FIRST SIX MONTHS OF 1996 WERE
DERIVED FROM DISPOSABLE OR IMPLANTABLE PRODUCTS."]

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Risk Factors."

THE COMPANY

Xomed is a leading developer, manufacturer and marketer of surgical products
for use by ear, nose and throat ("ENT") specialists. The Company offers a broad
line of products in its core ENT market that includes powered tissue-removal
systems and other microendoscopy instruments, implantable devices, nerve
monitoring systems and disposable fluid-control products. The Company also
offers a line of ophthalmic and other products. For the first half of 1996,
approximately 86% of Xomed's revenues were derived from disposable or
implantable products. The Company distributes its products worldwide through a
62-person direct sales force in the U.S. and selected other countries and
through a network of 121 independent distributors. Xomed is the only major
manufacturer and marketer of ENT surgical products with a direct U.S. sales
force exclusively serving ENT specialists. Approximately 34% of Xomed's
combined net sales was derived from international markets during the first half
of 1996, as compared to 23% of its combined net sales in 1993. With over 25
years of industry experience, Xomed believes that it has established a long-
standing reputation for innovative, high-quality products and is uniquely
positioned as the only major surgical products company focused on the ENT
market.

An estimated 15,000 ENT specialists practice worldwide, of which
approximately 58% or 8,700 practice in the United States. Diseases and
conditions addressed by ENT specialists affect sizable patient populations and
include chronic sinusitis, chronic infection of the middle ear, tonsils and
adenoids, nasal and laryngeal polyps and facial tumors. Increasingly, ENT
surgeons are expanding their practice to include facial plastic and
reconstructive surgery. The Company estimates that approximately three million
ENT procedures were performed in the U.S. in 1995 and that the U.S. market for
surgical instruments, devices and supplies used by ENT specialists was
approximately $200 million in 1995, as compared with $150 million in 1992.

Xomed believes that the ENT market is beginning a conversion from
conventional surgical approaches to less-traumatic approaches that involves the
use of advanced surgical tools, such as powered tissue-removal systems and
small-diameter surgical endoscopes, thereby minimizing patient trauma and
reducing procedure times. Xomed believes that the adoption of these less-
traumatic techniques may be driven by several factors, including economic
pressures and patient demand. Minimally invasive techniques have the potential
to expand the number of ENT procedures that can be performed in lower-cost
outpatient or day surgery settings. Patient demand is likely to increase due to
the reduced morbidity and improved outcomes. Xomed believes that the conversion
in the ENT market to less-traumatic approaches will be similar to recent
conversions in the general surgery market to less invasive techniques and the
orthopaedic surgery market to powered instrumentation systems.

Xomed's objective is to enhance its position in the ENT market. The principal
elements of its strategy to meet this objective include: (i) continued focus on
the ENT market; (ii) facilitation of the ENT market's conversion to less-
traumatic approaches; (iii) emphasis on product innovation through internal
research and development; (iv) maintenance of a broad product line, with
particular emphasis on disposable and implantable products; and (v) expansion
of the Company's global distribution network.

In April 1996, Xomed acquired TreBay Medical Corporation, a microendoscopy
company ("TreBay"). The senior management of TreBay, including James T. Treace,
F. Barry Bays and Thomas E. Timbie, assumed senior management positions at
Xomed at the time of the acquisition. These executives were formerly associated
with Concept, Inc., a minimally invasive surgical products company that was
acquired by Bristol-Myers Squibb Company in 1990.

3
<PAGE>

A substantial portion of the net proceeds of this offering will be used to
redeem shares of the Company's outstanding Series C Redeemable Preferred Stock,
approximately 78% of which is held by Warburg, Pincus Investors, L.P. ("WP
Investors"). The holders of the Series C Redeemable Preferred Stock have agreed
that the shares of Series C Redeemable Preferred Stock not redeemed will be
exchanged following the closing of this offering for shares of Common Stock at
the initial public offering price. Upon completion of this offering and the
subsequent exchange of shares of Series C Redeemable Preferred Stock for shares
of Common Stock, WP Investors will beneficially own approximately 48.1% of the
outstanding shares of Common Stock. See "Use of Proceeds" and "Principal
Stockholders."

The Company's principal executive office is located at 6743 Southpoint Drive
North, Jacksonville, Florida 32216 and its telephone number is (904) 296-9600.

RISK FACTORS

The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered........................... 2,500,000 shares
Common Stock to be outstanding after the
offering(1)................................... 6,879,362 shares(1)
Use of Proceeds................................ Repayment of outstanding
indebted-ness, redemption of
preferred stock and, to the
extent of an exercise of the
Underwriters' over-allotment
option, for working capital and
general corporate purposes.
Nasdaq National Market symbol.................. XOMD
</TABLE>
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(1) Excludes 501,191 shares of Common Stock issuable upon the exercise of
outstanding stock options having a weighted average exercise price of $9.76
per share. An aggregate of 167,909 additional shares of Common Stock have
been reserved for future grants under the Xomed Surgical Products, Inc. 1996
Stock Option Plan (the "Stock Option Plan"). See "Management--1996 Stock
Option Plan."

Except as otherwise specified, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option and has been adjusted to
give effect to: (i) the conversion upon the closing of this offering of all
outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock and the accrued and unpaid dividends thereon into
an aggregate of 766,991 shares of Common Stock and 2,191,674 shares of Non-
Voting Common Stock, respectively; (ii) the further conversion upon the closing
of this offering of all then-outstanding shares of Non-Voting Common Stock into
2,618,451 shares of Common Stock (collectively, the "Stock Conversion"); (iii)
the redemption of 239,234 shares of Series C Redeemable Preferred Stock from
the net proceeds of this offering; and (iv) the anticipated exchange within 31
days after the closing of this offering of the remaining 60,225 shares of
Series C Redeemable Preferred Stock for 314,650 shares of Common Stock, based
upon an assumed initial offering price of $20.00 per share (the "Share
Exchange"). Unless the context indicates or requires otherwise, as used in this
Prospectus, the "Company" or "Xomed" means Xomed Surgical Products, Inc. and
all of its subsidiaries and their respective predecessors.

4
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------------- -----------------
JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(HISTORICAL BASIS) (1):
Sales, net............ $6,787 $8,160 $10,071 $42,475 $59,865 $29,424 $32,942
Gross profit.......... 4,167 5,803 7,195 23,242 36,690 17,819 20,252
Selling, general and
administrative
expense.............. 3,155 3,914 6,074 19,126 27,077 12,440 14,129
Research and
development expense.. 84 211 311 1,958 2,405 1,158 1,669
Amortization of
intangibles.......... 436 391 394 2,652 2,579 1,224 1,168
Write-off of acquired
research and
development (2)...... -- -- -- -- -- -- 3,612
Restructuring charges
(3).................. -- -- -- -- -- -- 3,093
Operating income
(loss) from
continuing
operations........... 492 1,287 416 (494) 4,629 2,997 (3,419)
Income (loss) from
continuing
operations........... 231 669 219 (1,555) 325 427 (2,935)
Preferred stock
dividends............ -- 538
Income (loss) from
continuing operations
available to common
shareholders......... $ 325 $(3,473)
PRO FORMA STATEMENT OF
OPERATIONS DATA (4):
Income (loss) from continuing
operations......................... $ 68 $(3,472)
Income (loss) from continuing
operations per common share
available to common shareholders
(5)................................ $ 0.01 $ (0.75)
Weighted average common shares
outstanding (5).................... 4,632 4,635
OTHER STATISTICAL DATA (COMBINED
BASIS) (1):
Sales mix:
Core ENT products.................. $38,753 $39,573 $43,631 $21,532 $26,356
Other products..................... $16,682 $15,703 $16,234 $ 7,892 $ 6,586
Total............................. $55,435 $55,276 $59,865 $29,424 $32,942
Core ENT products sales growth...... -- 2% 10% 11% 22%
Percent of sales disposables and
implants........................... 79% 83% 84% 85% 86%
Percent of sales outside of U.S. ... 23% 26% 29% 31% 34%
Gross profit percentage............. 58% 54% 61% 61% 62%
</TABLE>

<TABLE>
<CAPTION>
JUNE 29, 1996
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED (6)(7)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $11,061 $16,248
Cost in excess of net assets acquired, net......... 47,054 47,054
Total assets....................................... 96,087 96,174
Long-term debt including Series C Redeemable Pre-
ferred Stock...................................... 60,941 12,209
Total shareholders' equity......................... 17,714 70,170
</TABLE>

See accompanying notes on following page.

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<PAGE>

(1) The statement of operations data includes the results of operations of
Xomed-Treace, Inc. since the date of its acquisition by the Company in
April 1994. Other statistical data is presented on a combined basis by
combining the historical data of the Company with that of Xomed-Treace,
Inc. for the periods prior to such acquisition. No purchase accounting
adjustments have been reflected in the combined periods prior to
acquisition.
(2) The Company's acquisition of TreBay in April 1996 was accounted for under
the purchase method of accounting. Accordingly, the purchase price of
approximately $6.6 million was allocated to the individual TreBay assets
acquired and liabilities assumed, based upon their respective fair values
at the date of acquisition. The transaction resulted in cost in excess of
net assets acquired of approximately $4.4 million, of which $3.6 million
was allocated to in-process research and development and charged to expense
in the second quarter of 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
(3) In the second quarter of 1996, the Company's new management team initiated
cost savings programs that resulted in reductions in the number of
employees at the Company's Mystic, Connecticut and Jacksonville, Florida
facilities. The Company incurred a one-time restructuring charge of
approximately $3.1 million during the second quarter of 1996 primarily to
reflect the cost of severance payments to terminated employees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

(4) Pro forma income (loss) from continuing operations has been adjusted to
reflect: (i) the Company's acquisition of TreBay as if the acquisition had
occurred on January 1, 1995 (see Notes to Consolidated Financial
Statements--Note 18--Pro Forma Statement of Operations (Unaudited)); (ii)
the capital contribution of accrued cumulative preferred stock dividends of
$7,559,000 in connection with the acquisition of TreBay; and (iii) the
Share Exchange.

(5) Pro forma income from continuing operations per common share available to
common shareholders and weighted average common shares outstanding have
been adjusted to give effect as of January 1, 1995 to: (i) the conversion
of all Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock outstanding as of December 31, 1995 into Common Stock and
Non-Voting Common Stock, respectively; (ii) the conversion of 390,000
shares of Series A Convertible Preferred Stock issued in the April 1996
acquisition of TreBay into Common Stock; (iii) the exercise of all
outstanding options to purchase Common Stock; and (iv) the Share Exchange.

(6) Adjusted to give effect to the receipt of the estimated net proceeds of
this offering based upon an assumed initial public offering price of $20.00
per share and the application of the net proceeds therefrom. See "Use of
Proceeds."
(7) Pro forma to give effect to: (i) the repayment of $1,275,000 in principal
amount of the Company's term loan on July 1, 1996 and the scheduled
repayment of $1,275,000 in principal amount of the term loan on October 1,
1996; (ii) the accretion of dividends on the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and the Series C Redeemable
Preferred Stock through October 1, 1996; (iii) the Stock Conversion; and
(iv) the Share Exchange.

6
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RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.

Possible Obsolescence from Technological Change; Uncertainty as to Market
Acceptance. The health care industry is characterized by rapidly changing
technology and frequent new product introductions. The Company believes that
its ability to develop and commercialize new products and enhancements of
existing products is critical to its continued growth and profitability. There
can be no assurance that the Company will continue to be successful in
identifying, developing and marketing new products or enhancing its existing
products. The Company's business will be adversely affected if the Company
incurs delays in developing new products or enhancements or if such products
or enhancements do not gain market acceptance. Market acceptance of the
Company's products will be determined in large part by the Company's ability
to demonstrate the surgical advantages, safety and efficacy, cost
effectiveness and performance features of such products, as well as to train
surgeons and other operating staff in their use. The Company believes that use
and acceptance by physicians and hospitals will be essential for market
acceptance of certain of its products, and there can be no assurance that its
products will be used or accepted. There can be no assurance that products or
technologies developed by others will not render the Company's products or
technologies noncompetitive or obsolete.

Possible Adverse Effects of Competition. The Company encounters significant
competition in all markets in which it participates. Many of the Company's
competitors and potential competitors have substantially greater resources,
including capital, name recognition, research and development experience and
regulatory, manufacturing and marketing capabilities. Many of these
competitors offer well established, broad product lines and ancillary services
not offered by the Company. Some of the Company's competitors have long-term
or preferential supply arrangements with hospitals, which may act as a barrier
to market entry. Other large health care companies may enter the market for
the Company's products in the future. Competing companies may succeed in
developing products that are more efficacious or less costly than any that may
be developed and marketed by the Company, and such companies also may be more
successful than the Company in production and marketing. Competing companies
may also exert competitive pricing pressures that may adversely affect the
Company's sales levels and margins. Rapid technological development by others
may result in the Company's products becoming obsolete before the Company
recovers a significant portion of the research, development and
commercialization expenses incurred with respect to those products. There can
be no assurance that the Company will be able to continue to compete
successfully with existing competitors or will be able to compete successfully
with new competitors.

Dependence on New Management and Other Key Personnel. The Company's future
success depends to a significant extent on the efforts and abilities of its
executive officers, the majority of whom have joined the Company since April
1996. Although the Company's new management has extensive experience in
managing medical device companies, the inability of new management to become
integrated fully into the operations of the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the loss of the services of certain of these
individuals could have a similar adverse effect on the Company. The Company
believes that its future success also will depend significantly upon its
ability to attract, motivate and retain additional highly skilled managerial,
operational, technical and sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting, assimilating and retaining the personnel it requires
to grow and operate profitably. See "Business--Employees" and "Management--
Executive Officers and Directors."

Risks Associated with Newly Established International Sales Operations;
Currency Exchange Risks. Within the past two years the Company has established
direct sales operations in five countries. The failure of these new direct
sales operations to develop successfully may have a material adverse effect

7
<PAGE>

on the Company's business, financial condition or results of operations.
International sales (including export sales) accounted for approximately 29%
of the Company's net sales in fiscal 1995 and 34% of net sales in the first
half of 1996, and the Company expects that international sales will continue
to be a significant portion of the Company's business. The Company's
international business may be affected by fluctuations in currency exchange
rates as well as increases in duty rates and difficulties in obtaining export
licenses. The Company's establishment of direct international sales operations
further increases its exposure to fluctuations in currency exchange rates,
which may adversely affect reported sales and earnings, because the sales of
these operations are denominated in local currency and not in U.S. dollars.

Seasonality and Quarterly Fluctuations. The Company's sales and operating
results have varied, and are expected to continue to vary, significantly from
quarter to quarter as a result of seasonal patterns, the timing of new product
introductions and promotional activities. The Company believes that its
business is seasonal in nature, with the third quarter of each year typically
having the lowest sales and the fourth quarter of each year typically having
the highest sales. Quarterly results of operations for any particular quarter
may not be indicative of results of operations for future periods. There can
be no assurance that future seasonal and quarterly fluctuations will not
adversely affect the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

Uncertainty Relating to Third Party Reimbursement. Demand for the Company's
products is likely to depend in part on the extent to which reimbursement for
the cost of such products and the procedures in which such products are used
will be available from government third-party payors (including the Medicare
and Medicaid programs), government health administration authorities, private
health insurers and other organizations. These third-party payors may deny
coverage if they determine that a procedure was not reasonable or necessary as
determined by the payor, was experimental or was used for an unapproved
indication. In addition, certain health care providers are moving towards a
managed care system in which such providers contract to provide comprehensive
health care for a fixed cost per person, irrespective of the amount of care
actually provided. Such providers, in an effort to control health care costs
are increasingly challenging the prices charged for medical products and
services and, in some instances, have pressured medical suppliers to lower
their prices. The Company believes, however, that the development of
procedure-specific instrumentation for use in less-traumatic procedures may in
certain cases reduce overall operating time and therefore reduce the aggregate
cost of those procedures. In addition, the Company does not depend upon
reimbursement from third-party payors with respect to its products used in
surgical cosmetic procedures. The Company is unable to predict what changes
will be made in the reimbursement methods utilized by third-party health care
payors. Furthermore, the Company could be adversely affected by changes in
reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for
procedures in which the Company's products are used. If coverage and adequate
reimbursement levels are not provided by government or third-party payors for
use of the Company's technologies or products, the Company's business,
financial position and ability to market its technologies or products will be
adversely affected. Reimbursement and health care payment systems in
international markets vary significantly by country, and include both
government sponsored health care and private insurance. To the extent that any
of the Company's products are not entitled to reimbursement in an
international market, market acceptance of such products in such international
market would be adversely affected. See "Business--Third-Party Reimbursement."

Uncertainty of Health Care Reform Measures. Federal, state and local
officials and legislators (and certain foreign government officials and
legislators) have proposed or are reportedly considering proposing a variety
of reforms to the health care systems in the U.S. and abroad. The Company
cannot predict what health care reform legislation, if any, will be enacted in
the U.S. or elsewhere. Significant changes in the health care system in the
U.S. or elsewhere are likely to have a substantial impact over time on the
manner in which the Company conducts its business. Such changes could have a
material adverse effect on the Company. See "Business--Government Regulation."

8
<PAGE>

Government Regulation. The Company's products, product development
activities, promotional and marketing activities and manufacturing processes
are subject to extensive and rigorous regulation by the U.S. Food and Drug
Administration ("FDA") and comparable agencies in foreign countries. In the
U.S., the FDA regulates the interstate commerce of medical devices as well as
the manufacturing, labeling, promotion and recordkeeping procedures for such
devices. In order for the Company to market its products in the U.S., the
Company must obtain from the FDA marketing clearance through what is known as
a 510(k) pre-market notification or obtain approval through a more detailed
application process resulting in what is known as pre-market approval ("PMA").
The process of obtaining marketing clearance for new medical devices from the
FDA can be costly and time consuming, and there can be no assurance that such
clearance will be granted for the Company's future products on a timely basis,
if at all, or that FDA review will not involve delays that will adversely
affect the Company's ability to commercialize additional products or expand
permitted uses of existing products.

Even if regulatory clearance to market a device is obtained from the FDA,
the clearance may entail limitations on the indicated uses of the device. The
clearance can also be withdrawn by the FDA due to the failure to comply with
regulatory standards or the occurrence of unforeseen problems following
initial clearance. The Company may be required to make further filings with
the FDA under certain circumstances such as the addition of new product
claims. The FDA could also limit or prevent the manufacture or distribution of
the Company's products and has the power to seize or require the recall of
such products. The Company has made modifications to its 510(k) cleared
devices which the Company believes do not require submission of new 510(k)s.
There can be no assurance, however, that the FDA would agree with any of the
Company's determinations and would not require the Company to submit new
510(k)s for any of the changes made to the devices and/or to stop marketing
until new 510(k)s are cleared by the FDA.

All of the products currently marketed by the Company either have received
marketing clearance pursuant to 510(k) pre-market notifications filed by the
Company and cleared by the FDA, or are exempt from obtaining marketing
clearance by virtue of their status as pre-amendment devices (i.e. devices
introduced into interstate commerce prior to May 28, 1976). A 510(k) pre-
market notification requires the manufacturer of a medical device to establish
that the device is "substantially equivalent" to medical devices legally
marketed in the U.S. For future products, there can be no assurance that the
FDA will concur in the Company's 510(k) request for clearance, or that the FDA
will not require the Company to file PMA applications. The process of
obtaining a PMA can be expensive, uncertain and lengthy, frequently requiring
anywhere from one to several years from the date of submission, if approval is
obtained at all. Significant delay or cost in obtaining, or failure to obtain
FDA clearance to market products, or any FDA limitations on the use of the
Company's products, could have a material adverse effect on the business,
financial condition and results of operations of the Company.

In addition, all of the products manufactured by the Company and its
contract manufacturers must be manufactured in compliance with the FDA's Good
Manufacturing Practice ("GMP") regulations. Ongoing compliance with GMP and
other applicable regulatory requirements is monitored through periodic
inspection by state and federal agencies, including the FDA. The FDA may
inspect the Company and its facilities from time to time to determine whether
the Company is in compliance with regulations relating to medical device
manufacturing companies, including regulations concerning manufacturing,
testing, quality control, record keeping and product labeling practices.

FDA regulations depend heavily on administrative interpretation, and there
can be no assurance that future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. In addition, changes in the existing regulations or adoption of
new governmental regulations or policies could prevent or delay regulatory
approval of the Company's products.

9
<PAGE>

of production, refusal of the government to grant pre-market clearance or pre-
market approval for devices, withdrawal of approvals and criminal prosecution.

A portion of the Company's revenue is dependent upon sales of its products
outside the U.S. Foreign regulatory bodies have established varying
regulations governing product standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. After June 1998, medical devices may not be sold in European
Union ("EU") countries unless they display the CE mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to obtain the right to
affix the CE mark to its products, the Company must obtain certification that
its processes meet European quality standards, including certification that
its design and manufacturing facility complies with ISO 9001 standards. There
can be no assurance that the Company will be able to obtain CE mark
certification for its products. The inability or failure of the Company or its
international distributors to comply with varying foreign regulations or the
imposition of new regulations could restrict or, in certain countries, result
in the prohibition of the sale of the Company's products internationally and
thereby adversely affect the Company's business, financial condition and
results of operations. See "Business--Government Regulation."

Uncertainty Regarding Patents and Proprietary Rights. The Company's success
will depend in part on its ability to develop patentable products, obtain
patent protection for its products both in the U.S. and in other countries and
enforce its patents. However, the patent positions of medical device companies
are generally uncertain and involve complex legal and factual questions. No
assurance can be given that patents will issue from any patent applications
owned by or licensed to the Company or that, if patents do issue, the claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any issued patents owned by or
licensed to the Company will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to
the Company. The Company also relies on unpatented trade secrets to protect
its proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent techniques
or otherwise gain access to the Company's proprietary technology or disclose
such technology or that the Company can ultimately protect meaningful rights
to such unpatented proprietary technology.

The commercial success of the Company will also depend in part on its
neither infringing patents issued to others nor breaching the licenses upon
which the Company's products might be based. The Company's licenses of patents
and patent applications impose various commercialization, sublicensing,
insurance, royalty and other obligations on the Company. Failure of the
Company to comply with these requirements could result in conversion of the
licenses from being exclusive to nonexclusive in nature or termination of the
licenses.

The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would likely result in substantial cost to the Company, may be necessary to
enforce any patents issued or licensed to the Company and/or to determine the
scope and validity of others' proprietary rights. In particular, competitors
of the Company and other third parties hold issued patents and are assumed by
the Company to hold pending patent applications which may result in claims of
infringement against the Company or other patent litigation. The Company also
may have to participate in interference proceedings declared by the U.S.
Patent and Trademark Office, which could result in substantial cost to the
Company, to determine the priority of inventions. Furthermore, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products which would compete unfairly with
products of the Company.

The Company relies on confidentiality agreements with its collaborators,
employees, advisors, vendors and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not

10
<PAGE>

otherwise become known or be independently developed by competitors. Failure
to obtain or maintain patent and trade secret protection, for any reason,
could have a material adverse effect on the Company. See "Business--Patents,
Trade Secrets and Proprietary Rights."

Dependence Upon Key Suppliers. Although the Company believes that there are
a number of possible vendors for most of the components and subassemblies
required for its products, certain materials, including thermoplastic
elastomer (TPE)-based materials used in certain of its ventilation tubes and
medical grade silicone used in certain of its ventilation tubes and implants,
currently are obtained from a single source. Moreover, substitute materials
may not be immediately available in quantities needed by the Company. Delays
associated with any future material shortages could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Suppliers."

Product Liability Risk; Limited Insurance Coverage. The manufacture and sale
of medical instrumentation entail significant risk of product liability claims
in the event that the use of such instrumentation is alleged to have resulted
in adverse effects on a patient. The Company has taken and will continue to
take what it believes are appropriate precautions, including maintaining
general liability and commercial liability insurance policies which include
coverage for product liability claims. Although the Company maintains what it
believes to be adequate insurance, there can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the sale of its
products. In addition, the Company may require, or desire to obtain, increased
product liability coverage in the future. Product liability insurance is
expensive and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or series of claims brought against
the Company in excess of its insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. Additionally, it is possible that adverse product liability
actions could negatively affect the Company's ability to obtain and maintain
regulatory approval for its products, as well as damage the Company's
reputation in any or all markets in which it participates. See "Business--
Product Liability and Insurance."

Environmental Matters. The past and present business operations of the
Company and the past and present ownership and operations of real property by
the Company are subject to extensive and changing federal, state, and local
environmental laws and regulations. The Company believes it is in material
compliance with all such applicable laws and regulations. The Company cannot
predict what environmental legislation or regulations will be enacted in the
future, how existing or future laws or regulations will be administered or
interpreted or what environmental conditions may be found to exist. Compliance
with more stringent laws or regulations or stricter interpretations of
existing laws may require additional expenditures by the Company, some of
which may be material. See "Business--Environmental Matters."

Influence by Existing Stockholders. Upon completion of this offering and the
Share Exchange, WP Investors will beneficially own approximately 48.1% of the
outstanding shares of Common Stock. A stockholders agreement among the Company
and substantially all of its current stockholders provides that WP Investors
has the right to designate specified numbers of persons to the Company's Board
of Directors so long as WP Investors maintains specified levels of ownership
of the outstanding Common Stock. Upon completion of this offering, WP
Investors will have under the stockholders agreement the right to designate
three persons to be appointed or nominated to the Company's Board of
Directors. Such share ownership and minority representation on the Company's
Board of Directors may confer upon WP Investors significant influence over the
affairs and actions of the Company. See "Management--Stockholders Agreement"
and "Principal Stockholders."

Shares Eligible for Future Sale; Potential for Adverse Effect on Stock
Price. Sales of a substantial number of shares of Common Stock in the public
market or the prospect of such sales could

11
<PAGE>

adversely affect prevailing market prices for the Common Stock. Upon
completion of this offering and the Share Exchange, the Company will have
outstanding 6,879,362 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option. Of these shares, the 2,500,000 shares of
Common Stock to be sold in this offering will be freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities
Act"), except for any such shares which may be acquired by an "affiliate" of
the Company. Subject to certain "lock-up" agreements covering an aggregate of
4,050,926 shares held by certain existing shareholders, approximately 108,900
shares of Common Stock (plus 137,816 shares issuable upon exercise of then
vested options) will be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act 90 days after the date of this offering, an
additional 4,206,711 shares will be eligible for sale in the public market
subject to compliance with the resale volume limitations and other
restrictions of Rule 144 under the Securities Act 90 days after the date of
this Prospectus and 48,399 shares will be eligible for sale in the public
market without restriction under Rule 144(k) under the Securities Act.
Promptly after the closing of this offering, the Company intends to file a
registration statement under the Securities Act covering the sale of 669,100
shares of Common Stock reserved for issuance under the Stock Option Plan. Upon
completion of this offering, there will be outstanding options to purchase a
total of 501,191 shares of Common Stock. The holders of approximately
4,340,429 shares of Common Stock, after giving effect to the Stock Conversion
and the Share Exchange, will hold certain registration rights with respect to
their shares of Common Stock. The sale of such shares could have a material
adverse effect on the Company's ability to raise capital in the public
markets. See "Management--1996 Stock Option Plan," "Description of Capital
Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."

Effect of Certain Charter and By-Law Provisions. The Company has amended its
Restated Certificate of Incorporation to authorize the issuance of Preferred
Stock without stockholder approval and upon such terms as the Board of
Directors may determine. The issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring or making a proposal to acquire, a majority of the
outstanding stock of the Company and could adversely affect the prevailing
market price of the Common Stock. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of holders of
Preferred Stock that may be issued in the future. The Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock."

Immediate and Substantial Dilution to New Investors. Investors purchasing
shares of Common Stock in this offering will incur substantial and immediate
dilution in the pro forma net tangible book value of the Common Stock from the
initial public offering price. In addition, these investors will incur
additional dilution upon the exercise of outstanding stock options. See
"Dilution."

No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock. Although
application will be made for approval for quotation of the Common Stock on the
Nasdaq National Market, there can be no assurance that an active trading
market for the Common Stock will develop or be sustained following this
offering or that the market price of the Common Stock will not decline below
the initial public offering price. The initial public offering price will be
determined by negotiation between the Company and the Representatives of the
Underwriters based upon several factors and may not be indicative of future
market prices. The price at which the Common Stock will trade will depend upon
a number of factors, including, but not limited to, the Company's historical
and anticipated operating results and general market and economic conditions,
some of which factors are beyond the Company's control. Factors such as
quarterly fluctuations in the Company's financial and operating results,
announcements by the Company or others and developments affecting the Company,
its products, its clients, the markets in which it competes or the industry
generally, also could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations. These broad market fluctuations may
adversely affect the market price of the Common Stock. See "Underwriting."

12
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be $45.8 million ($52.7 million
if the Underwriters' over-allotment option is exercised in full), after
deducting estimated underwriting discounts and expenses, assuming an initial
public offering price of $20.00 per share. Of the net proceeds of this
offering, $20.7 million will be used to repay the entire principal amount and
accrued interest under the Company's secured term loan facility (the "Term
Loan"). The Company will use the balance of the net proceeds of this offering,
after repayment of the Term Loan, plus the net proceeds from the sale of any
shares covered by the Underwriters' over-allotment option, for the redemption
of up to a maximum of $25.0 million of Series C Redeemable Preferred Stock,
with such redemption to be effected on the earlier of the closing date of the
sales of shares covered by the over-allotment option or the 30th day after the
date of the first closing of this offering. In the Share Exchange, all shares
of Series C Redeemable Preferred Stock remaining outstanding,immediately
following the redemption will be exchanged for shares of Common Stock, with
the number of shares of Common Stock to be issued in such exchange to be
determined by dividing the aggregate redemption price of such Series C
Redeemable Preferred Stock, plus accrued but unpaid dividends, by the per
share initial public offering price. Based upon an assumed initial public
offering price of $20.00 per share, 239,234 shares of Series C Redeemable
Preferred Stock having an aggregate redemption price of $25.0 million would be
redeemed and the remaining 60,225 shares of Series C Redeemable Preferred
Stock would be exchanged in the Share Exchange for 314,650 shares of Common
Stock. The balance of the net proceeds of any exercise of the Underwriters'
over-allotment option will be used for working capital and general corporate
purposes.

The principal amount of the Term Loan is due in twenty quarterly
installments commencing July 1, 1994 and ending April 15, 1999. The
indebtedness under the Term Loan bears interest, at the Company's election,
either at an annual rate of 1% plus a "base rate" (8.25% at September 2,
1996), or at 2.25% plus a "LIBOR rate" (5.58% at September 2, 1996).

Pending application of the proceeds as described above, the Company intends
to invest such proceeds in government securities and other short-term
interest-bearing securities.

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock. The Company
currently intends to retain any earnings to fund its business and therefore
does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company's existing credit agreement restricts the Company's
ability to pay dividends to its stockholders. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

13
<PAGE>

CAPITALIZATION

The following table sets forth: (i) the current portion of long-term debt
and capital lease obligations and the capitalization of the Company as of June
29, 1996; and (ii) such current portion of long-term debt and capitalization
as adjusted on a pro forma basis for (a) the sale by the Company of the
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $20.00 per share and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds," (b) the Stock Conversion
and (c) the Share Exchange. This table should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus:

<TABLE>
<CAPTION>
JUNE 29, 1996
--------------------
PRO FORMA
AS
ACTUAL ADJUSTED(1)
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term obligations:
Current portion of long-term debt and capital lease
obligations........................................ $ 5,236 $ 136
======= ========
Long-term debt:
Term Loan (1)....................................... $18,113 $ --
Revolving Credit Facility and Note Payable under
capital lease obligations.......................... 12,209 12,209
Series C Redeemable Preferred Stock, $1.00 par value,
600,000 shares authorized; 299,459 shares issued and
outstanding actual, no shares issued and outstanding
pro forma as adjusted (2)............................ 30,619 --
Shareholders' equity:
Series A Convertible Preferred Stock, $1.00 par
value, 1,200,000 shares authorized; 744,652 shares
issued and outstanding actual, no shares issued and
outstanding pro forma as adjusted.................. 7,241 --
Series B Convertible Preferred Stock, $1.00 par
value, 3,500,000 shares authorized; 2,127,838
shares issued and outstanding actual, no shares
issued and outstanding pro forma as adjusted....... 20,690 --
Undesignated Preferred Stock, $1.00 par value,
1,000,000 shares authorized (3), no shares issued
and outstanding actual or pro forma as adjusted.... -- --
Common Stock, $.01 par value, 30,000,000 shares
authorized (3); 679,270 shares issued and
outstanding actual (3), 6,879,362 shares issued and
outstanding pro forma as adjusted (4).............. 7 69
Non-Voting Common Stock, $.01 par value, 4,000,000
shares authorized; 426,777 shares issued and
outstanding actual, no shares issued and
outstanding pro forma as adjusted.................. 4 --
Accumulated deficit................................. (10,153) (10,153)
Shareholders' notes receivable...................... (187) (187)
Additional paid-in capital.......................... 112 80,441
------- --------
Total shareholders' equity........................ 17,714 70,170
------- --------
Total capitalization............................ $83,891 $ 82,515
======= ========
</TABLE>
- -------
(1) On July 1, 1996, the Company repaid $1,275,000 million in principal amount
of the Term Loan and is obligated to repay an additional $1,275,000
million in principal amount of the Term Loan on October 1, 1996. The
Company expects cash flow from operations and available borrowings under
its revolving credit facility to be adequate to make the October payment.
Includes accretion of dividends on the Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock and the Series C Redeemable
Preferred Stock through October 1, 1996 of $107,000, $306,000 and
$674,000, respectively, and the redemption of up to $25,000,000 of the
Series C Redeemable Preferred Stock.
(2) Gives effect, based upon an assumed initial offering price of $20.00 per
share, to the redemption of 239,234 shares of Series C Redeemable
Preferred Stock from the net proceeds of this offering and the Share
Exchange.

(3) Gives effect to an amendment to the Company's Restated Certificate of
Incorporation filed on September 12, 1996.

(4) Does not include 501,191 shares of Common Stock issuable upon the exercise
of outstanding stock options. An aggregate of 167,909 additional shares of
Common Stock have been reserved for future grants under the Company's
stock plans. See "Management--1996 Stock Option Plan."

14
<PAGE>

DILUTION

The pro forma net tangible book deficit of the Company at June 29, 1996 was
$(21,171,000) or approximately $(4.83) per share. Pro forma net tangible book
value per share represents the amount of total assets, excluding intangibles
(excess of cost over fair value of net assets acquired) less total
liabilities, divided by the aggregate number of shares of Common Stock
outstanding as of June 29, 1996 (on a pro forma basis after giving effect to
the accretion of dividends on the Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Redeemable Preferred Stock through
October 1, 1996 of $1,087,000 in the aggregate, the scheduled principal
payments of $2,550,000 in the aggregate on the Term Loan through October 1,
1996, the Stock Conversion and the Share Exchange). After giving effect to the
receipt of the net proceeds from the sale of the 2,500,000 shares of Common
Stock offered hereby, assuming an initial public offering price of $20.00 per
share and after deducting the estimated underwriting discount and offering
expenses to be paid by the Company, the pro forma net tangible book value of
the Company at June 29, 1996 would have been $24,579,000, or $3.57 per share.
This represents an immediate increase in net tangible book value of $8.40 per
share of Common Stock to existing stockholders and an immediate dilution of
approximately $16.43 per share to new investors purchasing shares in this
offering. The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $20.00
Pro forma net tangible book deficit per share before
this offering................................................. $(4.83)
Increase per share attributable to new investors............... 8.40
------
Pro forma net tangible book value per share after this offering. 3.57
------
Dilution per share to new investors............................. $16.43
======
</TABLE>

The following table sets forth, on a pro forma basis as of June 29, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by the new investors purchasing shares of Common
Stock from the Company in this offering (before deducting estimated
underwriting discount and offering expenses):

<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 4,379,362 64% $34,760,651 41% $ 7.94
New investors................. 2,500,000 36% $50,000,000 59% $20.00
--------- --- ----------- ---
Total......................... 6,879,362 100% $84,760,651 100%
========= === =========== ===
</TABLE>
- --------

(1) The foregoing tables exclude shares that were issuable upon exercise of
options outstanding at June 29, 1996. As of June 29, 1996, there were
options outstanding to purchase an aggregate of 441,191 shares at a
weighted average exercise price of $9.63 per share. Between June 29, 1996
and August 20, 1996, the Company granted options to purchase an aggregate
of 60,000 shares of Common Stock at a weighted average exercise price of
$10.65 per share. To the extent that outstanding options are exercised in
the future, there will be further dilution to new investors. See
"Management--1996 Stock Option Plan."

15
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included elsewhere herein and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company, prior to April 15, 1994, consisted solely of Merocel Corporation. The
selected consolidated financial data for all years presented has been derived
from the Company's audited financial statements, which have been audited by
Ernst & Young LLP, the Company's independent auditors. The selected
consolidated financial data as of and for the six months ended July 1, 1995
and June 29, 1996 have been derived from the Company's unaudited financial
statements. In the opinion of management, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial position and the results of
operations as of such dates and for such periods. The results for the six
months ended June 29, 1996 are not necessarily indicative of the results to be
expected for the entire year or the periods following in 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------------------- -----------------
JULY 1, JUNE 29,
1991 1992 1993 1994(1) 1995 1995 1996
------ ------ ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (HISTORICAL BA-
SIS)(1):
Sales, net............. $6,787 $8,160 $10,071 $42,475 $59,865 $29,424 $ 32,942
Cost of sales.......... 2,620 2,357 2,876 15,350 22,256 10,686 12,690
Amortization of
acquisition costs
allocated to inventory. -- -- -- 3,883 919 919 --
------ ------ ------- ------- ------- ------- --------
Gross profit........... 4,167 5,803 7,195 23,242 36,690 17,819 20,252
Operating Expenses:
Selling, general and
administrative ....... 3,155 3,914 6,074 19,126 27,077 12,440 14,129
Research and
development........... 84 211 311 1,958 2,405 1,158 1,669
Amortization of
intangibles (2)....... 436 391 394 2,652 2,579 1,224 1,168
Write-off of acquired
research and
development........... -- -- -- -- -- -- 3,612
Restructuring charges.. -- -- -- -- -- -- 3,093
------ ------ ------- ------- ------- ------- --------
Total operating 3,675 4,516 6,779 23,736 32,061 14,822 23,671
expenses.............. ------ ------ ------- ------- ------- ------- --------
Operating income (loss)
from continuing
operations............ 492 1,287 416 (494) 4,629 2,997 (3,419)
Interest expense....... (125) (73) (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), 38 47 26 313 114 (136) 64
net................... ------ ------ ------- ------- ------- ------- --------
Income (loss) from
continuing operations
before income tax
expense (benefit)..... 405 1,261 340 (2,329) 1,680 1,282 (4,891)
Income tax expense 174 592 121 (774) 1,355 855 (1,956)
(benefit)............. ------ ------ ------- ------- ------- ------- --------
Income (loss) from
continuing operations. 231 669 219 (1,555) 325 427 (2,935)
Discontinued Operations
(3):
Income from operations
of discontinued
surgical drapes
segment (net of tax).. -- -- -- 463 306 295 --
Loss on disposal of
surgical drapes -- -- -- -- (2,485) -- --
segment (net of tax).. ------ ------ ------- ------- ------- ------- --------
Net income (loss)...... $ 231 $ 669 $ 219 $(1,092) $(1,854) $ 722 $ (2,935)
====== ====== ======= ======= ======= ======= ========
PRO FORMA STATEMENT OF
OPERATIONS DATA (4):
Income (loss) from
continuing operations. $ 68 $ (2,934)
Preferred stock -- 538
dividends............. ------- --------
Income (loss) from
continuing operations
available to common
shareholders (5)...... 68 (3,472)
Interest expense, net 1,300 581
of taxes.............. ------- --------
Supplementary income
(loss) from continuing $ 1,368 $ (2,891)
operations (6)........ ======= ========
Pro forma per share
Income (loss) from
continuing operations
available to common $ .01 $ (.75)
shareholders.......... ======= ========
Supplementary income
(loss) from continuing
operations available
to common $ .30 $ (.62)
shareholders.......... ======= ========
Pro forma weighted
average common shares 4,632 4,635
outstanding (5)....... ======= ========
Supplementary pro forma
weighted average
common shares 7,132 7,135
outstanding (6)....... ======= ========
</TABLE>
See accompanying notes.

16
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 2,146 $ 2,108 $ 3,126 $12,744 $12,234 $10,407 $11,061
Cost in excess of net
assets acquired, net... -- -- -- 54,300 46,381 53,182 47,054
Total assets............ 7,968 8,483 9,484 95,720 93,123 92,937 96,087
Long-term debt including
redeemable preferred
stock.................. 9,003 8,644 9,038 65,102 64,173 62,204 60,941
Total shareholders' eq-
uity (deficit)......... (1,725) (1,054) (834) 17,547 13,257 17,046 17,714
</TABLE>
- --------
(1) The statement of operations data includes the results of operations of
Xomed-Treace, Inc. since the date of its acquisition by the Company in
April 1994.

(2) Amortization of intangibles includes amortization of foreign distribution
rights of $838,000, $162,000 and $162,000, respectively, for the years
ended December 31, 1994 and 1995 and the six months ended July 1, 1995.

(3) In July 1995, the Company sold its surgical drapes segment to an unrelated
third party and simultaneously acquired from this party prosthetic implant
device and ventilation tube product lines. The Company has treated the
surgical drapes segment as a discontinued operation, and a loss on
disposition of $2,485,000 (after income tax benefit of $1,386,000) was
recorded upon completion of the transaction. The Company has restated its
Statement of Operations to reflect its treatment of this segment as a
discontinued operation. Income from continuing operations is after income
tax expense of $309,000, $203,000 and $197,000 for the years ended
December 31, 1994 and 1995 and for the six months ended July 1, 1995,
respectively.

(4) The pro forma income from continuing operations has been adjusted to
reflect: (i) the acquisition of TreBay as if the acquisition had occurred
on January 1, 1995 (see Notes to Consolidated Financial Statements--Note
18--Pro Forma Balance Sheet and Statement of Operations (Unaudited)); (ii)
the capital contribution of accrued cumulative preferred stock dividends
of $7,559,000 in connection with the acquisition of TreBay; and (iii) the
Share Exchange.

(5) Pro forma income from continuing operations per common share and weighted
average common shares outstanding have been adjusted to give effect as of
January 1, 1995 to: (i) the conversion of all Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock outstanding as of
December 31, 1995 into Common Stock and Non-Voting Common Stock,
respectively; (ii) the conversion of 390,000 shares of Series A
Convertible Preferred Stock issued in the April 1996 acquisition of TreBay
into Common Stock; (iii) the exercise of all outstanding options to
purchase Common Stock; and (iv) the Share Exchange.

(6) Supplementary pro forma net income per share is computed upon the basis
stated above in notes 4 and 5 and giving effect to the sale by the Company
of the 2,500,000 shares of Common Stock offered hereby and the repayment
of approximately $23,213,000 of principal amount of the Term Loan and
$25,000,000 of Series C Redeemable Preferred Stock as if the offering was
effected January 1, 1995. Interest expense, net of tax benefit, totaling
$1,299,770 and $580,632 for the year ended December 31, 1995 and six
months ended June 29, 1996 has been eliminated as a result of the assumed
repayment of the Term Loan.

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."

OVERVIEW

The Company is a leading developer, manufacturer and marketer of surgical
products for use by ENT specialists. The Company offers a broad line of
products in its core ENT market that includes powered tissue-removal systems
and other microendoscopy instruments, implantable devices, nerve monitoring
systems and disposable fluid-control products. The Company also offers a line
of ophthalmic and other products. The Company distributes its products on a
worldwide basis through a 62-person direct sales organization in the U.S. and
selected other countries and through a network of 121 independent
distributors.

BACKGROUND

The business of Xomed, Inc. was established in 1970 to manufacture and
distribute ventilation tube implants for the middle ear. In 1979, the business
was acquired by Bristol-Myers Squibb Company ("Bristol-Myers"). In 1989,
Bristol-Myers acquired Treace Medical, Inc. and merged the two companies
together forming Xomed-Treace, Inc. On April 15, 1994, Bristol-Myers sold
Xomed-Treace, Inc. to the Company for a purchase price of approximately $81.0
million (the "Xomed Acquisition"). The Company is a Delaware corporation
formerly known as Merocel/Xomed Holdings, Inc., which was organized for the
purpose of acquiring all of the outstanding stock of Merocel Corporation
("Merocel") and of Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc.
(collectively, "Xomed-Treace"). Merocel, which was formed in 1970,
manufactures and markets a line of disposable fluid-control products primarily
used in sinus surgery and rhinology.

In July 1995, the Company sold its surgical drapes segment to an unrelated
party and simultaneously acquired from this party several otology product
lines (the "Otology Acquisition"). In April 1996, the Company acquired TreBay,
a microendoscopy products company. The senior management of TreBay, including
James T. Treace, F. Barry Bays and Thomas E. Timbie, assumed senior management
positions at the Company at the time of the Company's acquisition of TreBay.

XOMED ACQUISITION

The Xomed Acquisition has significantly affected the Company's results of
operations following the April 15, 1994 consummation of the transaction. The
Xomed Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price of approximately $81.0 million was
allocated to the assets acquired and liabilities assumed based upon their
respective fair values at date of acquisition. The excess of the purchase
price over the fair market value of the net assets acquired of approximately
$56.0 million ($49.9 million related to continuing operations) was allocated
to goodwill. As a result, amortization of intangibles (over a 25-year life)
has been significantly increased. Further, the value of inventory of
continuing operations was increased by $4.8 million and was charged to cost of
goods sold for the 1994 period following the Xomed Acquisition ($3.9 million)
and the first quarter of 1995 ($0.9 million) (the "Inventory Valuation
Adjustment"). These costs reduced gross profit in these periods. Other
intangible assets relating to foreign distribution rights were valued in
connection with the acquisition, and as a result, amortization of intangibles
was increased by $0.8 million for the 1994 period following the Xomed
Acquisition and $0.2 million for the first quarter of 1995 (the "International
Distribution Rights Amortization"). In addition, interest expense increased
due to the increased borrowings to finance the Xomed Acquisition.

The Xomed Acquisition and the Company's initial working capital were funded
primarily through the issuance of $43.5 million of preferred stock and from
the incurrence of approximately $45.9 million in

18
<PAGE>

long-term debt. In connection with the Xomed Acquisition, management
implemented a restructuring plan for Xomed-Treace that included the closing of
manufacturing operations in Puerto Rico and the elimination of certain
overhead in other facilities.

DISCONTINUED OPERATIONS

The surgical drapes segment sold in July 1995 in the Otology Acquisition has
been reflected as discontinued operations and a loss on discontinuance of
approximately $2.5 million (after a $1.4 million tax benefit) was recorded in
the third quarter of 1995.

CHANGE IN DISTRIBUTION CHANNELS

On January 1, 1996 the Company effected two changes in its product
distribution to focus the Company's resources on its core product lines of
sinus and rhinology, head and neck and otology. The first involved changing
from distributing its ophthalmic product line through its direct sales force
to distributing this line through an independent dealer network. As a result
of this change, the Company's net sales were approximately $0.9 million lower
in the first half of 1996 than they would have been if the ophthalmic product
line had continued to be distributed through the Company's direct sales force.

The second change involved moving the distribution of the Company's Merocel
fluid-control products from an independent dealer network to the Company's
U.S. direct sales force. As a result of this change, the Company's net sales
were approximately $0.5 million higher in the first half of 1996 than they
would have been if the Merocel product line had continued to be distributed
through independent dealers.

ACQUISITION OF TREBAY

The Company's acquisition of TreBay in April 1996 has been accounted for
under the purchase method of accounting. Accordingly, the purchase price of
approximately $6.6 million was allocated to the individual assets acquired and
liabilities assumed, based upon their respective fair values at the date of
acquisition. The transaction resulted in cost in excess of net assets acquired
of $4.4 million, of which $3.6 million was allocated to in-process research
and development and charged to expense in the second quarter of 1996. The
acquisition was funded through the issuance of $2.8 million of redeemable
preferred stock and $3.7 million of convertible preferred stock.

RESTRUCTURING CHARGES

During the second quarter of 1996, the Company's new management team
initiated cost savings programs that resulted in reductions in the number of
employees at the Company's Mystic, Connecticut and Jacksonville, Florida
facilities. The restructuring eliminated redundant overhead at the two sites,
and the Company expects these actions to yield cost savings primarily in
general and administrative expense. The Company incurred a one-time
restructuring charge of approximately $3.1 million during the second quarter
of 1996 primarily to reflect the cost of the severance payments to terminated
employees.

OTHER RECENT EVENTS

In December 1995, the Company became the exclusive worldwide distributor of
Implantech Associates, Inc.'s line of facial plastic implants to the ENT
market. In April 1996, the Company became the exclusive distributor of BOSS
Instruments Ltd.'s line of hand instrumentation products to the U.S. ENT
market. The Company introduced in the second quarter of 1996 its Wizard Plus
powered tissue-removal system and NIM-2(R) XL nerve monitoring system. In
connection with the introduction of these new products, the Company reserved
significant numbers of the initial products manufactured as samples to be used
by its sales force in their marketing efforts, which resulted in a charge to
selling, general and administrative expenses of approximately $0.6 million
during the first half of 1996.

SEASONALITY

The Company's sales and operating results have varied, and are expected to
continue to vary significantly from quarter to quarter as a result of seasonal
patterns. The Company believes that its

19
<PAGE>

business is seasonal in nature, with the third quarter of each year typically
having the lowest sales and the fourth quarter of each year typically having
the highest sales. There can be no assurance that future seasonal fluctuations
will not adversely affect the Company's business, financial condition and
results of operations.

RESULTS OF OPERATIONS--COMBINED

Xomed-Treace was acquired on April 15, 1994. As a result of Xomed-Treace's
inclusion in the Company's financial statements since the date of the Xomed
Acquisition, the revaluation of the net assets acquired and the related
impacts on cost of sales and expenses, the Consolidated Financial Statements
of the Company for periods prior to April 15, 1994 are not comparable to those
of subsequent periods.

The following table has been prepared by combining ("combined basis") the
historical data of Merocel with Xomed-Treace for periods prior to the Xomed
Acquisition. No purchase accounting adjustments have been reflected in the
combined periods prior to acquisition. The Company believes this presentation
provides a more meaningful basis for presenting "Management's Discussion and
Analysis of Financial Condition and Results of Operations" than using the
historical selected consolidated financial data also presented herein.

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales, net (1)................... $55,435 $55,276 $59,865 $29,424 $32,942
Cost of sales (2) ............... 23,568 21,436 22,256 10,686 12,690
Amortization of acquisition costs -- 3,883 919 919 --
allocated to inventory........... ------- ------- ------- ------- -------
Gross profit..................... 31,867 29,957 36,690 17,819 20,252
Operating Expenses:
Selling, general and
administrative.................. 21,139 24,497 27,077 12,440 14,129
Research and development........ 3,077 2,650 2,405 1,158 1,669
Amortization of intangibles (3)
................................ 1,201 2,950 2,579 1,224 1,168
Write-off of acquired research
and development................. -- -- -- -- 3,612
Restructuring charge............ -- -- -- -- 3,093
------- ------- ------- ------- -------
Total operating expenses......... 25,417 30,097 32,061 14,822 23,671
------- ------- ------- ------- -------
Operating income (loss) from
continuing operations............ 6,450 (140) 4,629 2,997 (3,419)
Interest expense ................ (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), net...... 360 330 114 (136) 64
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income tax
expense (benefit)............... 6,708 (1,958) 1,680 1,282 (4,891)
Income tax expense (benefit)..... 2,541 (633) 1,355 855 (1,956)
------- ------- ------- ------- -------
Income (loss) from continuing $ 4,167 $(1,325) $ 325 $ 427 $(2,935)
operations....................... ======= ======= ======= ======= =======
</TABLE>
- --------

(1) On January 1, 1996, the Company effected two changes in its product
distribution. The first involved changing from distributing its ophthalmic
product line through its direct sales force to distributing this line
through an independent dealer network. As a result of this change, the
Company's net sales were approximately $0.9 million lower in the first
half of 1996 than they would have been if the ophthalmic product line had
continued to be distributed through the Company's direct sales force. The
second change involved moving the distribution of the Company's Merocel
fluid-control products from an independent dealer network to the Company's
U.S. direct sales force. As a result of this change, the Company's net
sales were approximately $0.5 million higher in the first half of 1996
than they would have been if the Merocel product line had continued to be
distributed through independent dealers.
(2) For historical periods, $3,883,000, $919,000 and $919,000 of the Inventory
Valuation Adjustment was charged to cost of sales for the years ended
December 31, 1994 and 1995 and the six months ended July 1, 1995,
respectively.
(3) For historical periods, $838,000, $162,000 and $162,000 of additional
amortization expense related to the International Distribution Rights
Amortization was incurred for the years ended December 31, 1994 and 1995
and the six months ended July 1, 1995, respectively.

20
<PAGE>

The following table sets forth certain sales and expense data as a
percentage of the Company's total sales on a combined basis for each period
presented:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------- ---------------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Sales, net................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............. 42.5 38.8 37.2 36.3 38.5
Amortization of acquisition
costs allocated to inven-
tory...................... 0.0 7.0 1.5 3.1 0.0
-------- -------- -------- ----- -----
Gross profit............... 57.5 54.2 61.3 60.6 61.5
-------- -------- -------- ----- -----
Operating Expenses:
Selling, general and ad-
ministrative.............. 38.1 44.3 45.3 42.3 42.9
Research and development.. 5.6 4.8 4.0 3.9 5.1
Amortization of intangi-
bles...................... 2.2 5.3 4.3 4.2 3.5
Write-off of acquired re-
search and development.... 0.0 0.0 0.0 0.0 11.0
Restructuring charges..... 0.0 0.0 0.0 0.0 9.4
-------- -------- -------- ----- -----
Total operating expenses... 45.9 54.4 53.6 50.4 71.9
-------- -------- -------- ----- -----
Operating income (loss)
from continuing opera-
tions..................... 11.6 (0.2) 7.7 10.2 (10.4)
Interest expense........... (0.2) (3.9) (5.1) (5.4) (4.7)
Other income (expense),
net....................... 0.7 0.6 0.2 (0.4) 0.2
-------- -------- -------- ----- -----
Income (loss) from
continuing operations
before income tax expense
(benefit)................. 12.1 (3.5) 2.8 4.4 (14.9)
Income tax expense (bene-
fit)...................... 4.6 (1.1) 2.3 2.9 (6.0)
-------- -------- -------- ----- -----
Net income (loss) from con-
tinuing operations........ 7.5% (2.4)% 0.5% 1.5% (8.9)%
======== ======== ======== ===== =====
</TABLE>

21
<PAGE>

SALES COMPOSITION--RESULTS OF OPERATIONS (COMBINED)

The Company derives its sales from various markets within the ENT industry.
Sinus and rhinology, head and neck and otology are the three core markets in
which the Company operates. In addition to products for these markets, the
Company has other product offerings including a line of ophthalmic products,
which the Company has recently converted from distributing through its direct
sales force to distributing through independent dealers. The following table
summarizes the Company's worldwide product line sales during the periods
indicated and has been prepared by combining the historical data of Merocel
with Xomed-Treace for periods prior to the Xomed Acquisition:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
Sinus and Rhinology.............. $14,273 $15,641 $17,038 $ 8,531 $10,920
Head and Neck.................... 13,000 12,966 14,187 6,781 7,831
Otology.......................... 11,480 10,966 12,406 6,220 7,605
------- ------- ------- ------- -------
Total Core Business............ 38,753 39,573 43,631 21,532 26,356
Ophthalmic and Other............. 16,682 15,703 16,234 7,892 6,586
------- ------- ------- ------- -------
Total......................... $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
PERCENTAGE OF SALES:
Sinus and Rhinology.............. 25.7% 28.3% 28.5% 29.0% 33.1%
Head and Neck.................... 23.5 23.5 23.7 23.1 23.8
Otology.......................... 20.7 19.8 20.7 21.1 23.1
------- ------- ------- ------- -------
Total Core Business............ 69.9 71.6 72.9 73.2 80.0
Ophthalmic and Other............. 30.1 28.4 27.1 26.8 20.0
------- ------- ------- ------- -------
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>

The Company distributes its products on a worldwide basis through a 62-
person direct sales force in the U.S. and selected other countries and through
a network of 121 independent distributors. The Company's core ENT products are
sold in the U.S. only on a direct sales basis.

22
<PAGE>

Prior to 1994, the Company's international sales and distribution were
conducted jointly with Zimmer International, a division of Bristol-Myers and a
former affiliate. Since that time, the Company has developed its own
international sales and distribution network. Approximately 29.4% of the
Company's net sales in 1995 and 34.3% of its net sales during the first half
of 1996 were made outside the U.S. through direct operations in the United
Kingdom, Canada, France, Germany and Australia, as well as through 102
independent international distributors, many of whom distribute the Company's
products exclusively. The following table summarizes the Company's U.S. and
international sales for the periods indicated and has been prepared by
combining the historical data of Merocel with Xomed-Treace for periods prior
to the Xomed Acquisition:

The Company places particular emphasis on disposable products and
implantable devices, which represented 86.3% of sales during the first half of
1996, as compared with 78.9% of sales in 1993. One of the Company's principal
objectives is to continue to develop additional disposable products for use
with its instrumentation systems. Recently, the Company introduced the Typhoon
line of disposable blades, which is the only blade system in the market place
that is interchangeable among the various power hand pieces on the market. The
following table summarizes the Company's sales of equipment and
instrumentation products as well as disposable and implantable products for
the periods indicated and has been prepared by combining the historical data
of Merocel with Xomed-Treace for periods prior to the Xomed Acquisition:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SALES:
Equipment and Instrumentation
Products....................... $11,685 $ 9,546 $ 9,396 $ 4,448 $ 4,513
Disposable and Implantable Prod-
ucts........................... 43,750 45,730 50,469 24,976 28,429
------- ------- ------- ------- -------
Total......................... $55,435 $55,276 $59,865 $29,424 $32,942
======= ======= ======= ======= =======
PERCENTAGE OF SALES:
Equipment and Instrumentation
Products....................... 21.1% 17.3% 15.7% 15.1% 13.7%
Disposable and Implantable Prod-
ucts........................... 78.9 82.7 84.3 84.9 86.3
------- ------- ------- ------- -------
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>

SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995

Net Sales. Net sales increased 12.0% to $32.9 million in the first half of
1996 from $29.4 million in the comparable period in 1995. In the core
businesses of sinus and rhinology, head and neck and otology, sales increased
22.4% in the first half of 1996 over the prior comparable period, which
resulted in these

23
<PAGE>

product lines representing 80.0% of the Company's revenue during the first
half of 1996 as compared to 73.2% in the first half of 1995. These increases
were principally the result of sales generated from several new products
introduced recently including the Company's Wizard and Wizard Plus powered
tissue-removal systems, the Activent anti-microbial vent tube line, an otology
implant line acquired in the Otology Acquisition in the third quarter of 1995
and a line of facial implant products. In addition, several existing product
lines showed strong sales growth over the prior period including the Merocel
fluid-control products and the NIM-2(R) XL nerve monitoring system. The
increase in Merocel products sales was due partly to price increases resulting
from moving the distribution of these products, effective on January 1, 1996,
from an independent dealer network to the Company's U.S. direct sales force.
Sales were adversely affected, however, by a change in the distribution system
for the Company's ophthalmic product line. On January 1, 1996, the Company
commenced distribution of its ophthalmic line through an independent dealer
network, with the Company selling to dealers at wholesale prices. During the
first half of 1995, these products were distributed through the Company's
direct sales force at retail pricing. This change was made to better focus the
direct sales force on the ENT market. Although unit volume in the ophthalmic
business was comparable between the two periods, net sales decreased as a
result of the price differential from changing the distribution channel.
Associated ophthalmic operating expenses also declined. Sales also increased
in several other product lines due to increased penetration of international
markets through recently established direct sales sites. International sales
increased 25.2% during the period and represented 34.3% of the Company's
revenue in the first half of 1996 compared to 30.7% in the first half of 1995.

Cost of Sales. Cost of sales increased 9.3% to $12.7 million in the first
half of 1996 from $11.6 million in the first half of 1995. As a percent of
sales, cost of sales decreased to 38.5% in the first half of 1996 from 39.4%
in the prior comparable period. In accounting for the Xomed Acquisition, the
Company effected the Inventory Valuation Adjustment by which a portion of the
excess cost of the acquisition over book value of the net assets acquired was
allocated to inventory. This allocation resulted in an increase in inventory
value of $5.3 million, of which $4.8 million was allocated to the inventory of
continuing operations. The inventory valued on this basis was charged to cost
of sales on a FIFO basis as it was sold. This increased cost of sales in the
first half of 1995 by $0.9 million. No such adjustment affected 1996. Without
this charge, cost of sales would have increased 18.8% to $12.7 million in the
first half of 1996 from $10.7 million in the prior comparable period and cost
of sales as a percent of sales would have increased to 38.5% in the first half
of 1996 from 36.3% in the prior comparable period. This increase was primarily
due to the change in the distribution method described above for the
ophthalmic line which resulted in lower average selling prices. This increase
was partially offset by an increase in the ratio of higher margin disposable
and implantable products to equipment and instrumentation products, as well as
the change in the distribution of the Merocel product line which resulted in a
higher average selling price.

Gross Profit. Gross profit as a percent of sales increased to 61.5% in the
first half of 1996 from 60.6% in the prior comparable quarter. Without the
effects of the Inventory Valuation Adjustment discussed above, gross profit as
a percent of sales would have decreased to 61.5% in the first half of 1996
from 63.7% in the prior comparable period for the reasons discussed above.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 13.6% to $14.1 million in the first half of
1996 from $12.4 million in the prior comparable period. This increase was due
primarily to higher commissions on a larger sales base, an increase in the
average commission rate, the operating expenses of a new direct sales
subsidiary in Germany, which began operations in the first quarter of 1996,
and promotional expenses related to the Company's line of sinus endoscopy
systems. As a percent of sales, selling, general and administrative expenses
increased to 42.9% in the first half of 1996 from 42.3% in the comparable 1995
period. The Company expects to leverage its selling, general and
administrative expense structure to reduce these expenses as a percent of
sales. In addition, the Company believes that certain restructuring actions
taken in the second quarter of

24
<PAGE>

1996 should result in savings that will further reduce these expenses as a
percent of sales. There can be no assurances, however, that management will be
able to decrease selling, general and administrative expenses as a percentage
of sales through such restructuring actions.

Research and Development. Research and development expenses increased 44.1%
to $1.7 million in the first half of 1996 from $1.2 million in the first half
of 1995 and increased as a percent of sales to 5.1% from 3.9% during the same
period. This increase is primarily the result of project expenses related to
the development of the new XPS powered tissue-removal system and the
Powerforma drill system. Although it has in the past relied in part on
strategic acquisitions and licensing of third-party technology to develop its
broad line of ENT products, the Company believes it has a strong base of
proprietary engineering, manufacturing and bio-material capabilities upon
which to build its future research and development efforts. The Company plans
to increase research and development expenses while maintaining spending as a
percent of sales to a ratio similar to that in the first half of 1996.

Amortization. Amortization expense in the first half of 1996 and in the
first half of 1995 related principally to approximately $49.9 million of
goodwill related to continuing operations generated from the Xomed Acquisition
in April 1994, which is being amortized over 25 years.

Write-off of Acquired Research and Development. The TreBay acquisition was
accounted for under the purchase method of accounting. Accordingly, the
purchase price of approximately $6.6 million was allocated to the individual
TreBay assets acquired and liabilities assumed, based upon their respective
fair values at the date of acquisition. The transaction resulted in cost in
excess of net assets acquired of approximately $4.4 million, of which $3.6
million was allocated to in-process research and development and charged to
expense in the second quarter of 1996.

Restructuring. In the second quarter of 1996, the Company's new management
team initiated cost savings programs that resulted in reductions in the number
of employees at the Company's Mystic, Connecticut and Jacksonville, Florida
facilities. The restructuring eliminated redundant overhead at the two sites,
and the Company expects these actions to yield cost savings primarily in
selling, general and administrative expenses, although there can be no
assurances that such cost savings will be achieved. The Company incurred a
one-time restructuring charge of approximately $3.1 million during the second
quarter of 1996 to reflect the cost of severance payments to terminated
employees as well as other restructuring expenses.

Interest and Other. Interest expense during the first half of 1996 was
consistent with the prior comparable period at approximately $1.5 million.
Interest expense related principally to the Term Loan and the Company's
secured revolving credit facility (the "Revolving Credit Facility") as
described below in "--Liquidity and Capital Resources." Other income of
$64,000 in the second half of 1996 was $200,000 higher than the $136,000 of
expense reported in the first half of 1995 related principally to royalty
income on a product licensed to a third party.

Income Taxes. The benefit for income taxes in the first half of 1996 of $2.0
million was $2.9 million lower than the $0.9 million expense recorded in the
prior comparable period. The tax benefit in 1996 resulted primarily from the
recording of the write-off of acquired research and development and
restructuring expense discussed above. The Company's effective tax rate in the
first half of 1996 was 40% as compared to 67% in the prior comparable period.
The Company's effective tax rate was high in 1995 due principally to losses
incurred by foreign direct sales subsidiaries during their start-up stages,
the related tax benefits of which were not recorded because of uncertainty as
to their ultimate realization. The 1996 effective tax rate assumes that the
foreign direct sales subsidiaries become profitable during the year. There can
be no assurance that the foreign subsidiaries will be profitable in 1996. A
failure of the foreign subsidiaries to be profitable in 1996 could result in
an effective tax rate higher than the 40% currently being utilized.

25
<PAGE>

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net Sales. Historical net sales increased 40.9% to $59.9 million in 1995
from $42.5 million in 1994, principally as a result of the inclusion of Xomed-
Treace's operations for the full year 1995 as compared to eight and one-half
months in 1994.

Combined net sales increased 8.3% to $59.9 million in 1995 from $55.3
million in 1994. In the core businesses, sales increased 10.3% in 1995 over
1994, which resulted in these product lines representing 72.9% of the
Company's revenue during 1995 as compared to 71.6% in 1994. This increase was
primarily the result of increased volume across several product lines, most
notably in the Company's NIM-2 (R) nerve monitoring system. In addition, new
product sales increased from the Company's Wizard powered tissue-removal
system which was introduced during the third quarter of 1995, a line of sinus
microendoscopy instrumentation and sales generated from the acquisition of an
otology implant line acquired in the Otology Acquisition during the third
quarter of 1995. New international direct sales operations were established in
Canada and Australia during the third quarter of 1994 and in the United
Kingdom and France during the first quarter of 1995, which resulted in
increased penetration of existing and new products in these markets, as well
as higher pricing for these products because of the change to distributing
directly rather than through wholesale distribution channels. International
sales increased 22.8% during the year and represented 29.4% of the Company's
revenue in 1995 versus 25.9% in 1994.

Cost of Sales. Historical cost of sales increased 20.5% to $23.2 million in
1995 from $19.2 million in 1994 principally as a result of the inclusion of
Xomed-Treace's operations for the full year 1995 as compared to eight and one-
half months in 1994. Historical cost of sales included charges related to the
Inventory Valuation Adjustment from the Xomed Acquisition consisting of $0.9
million in 1995 and $3.9 million in 1994.

Combined cost of sales decreased 8.5% to $23.2 million in 1995 from $25.3
million in 1994 and, as a percent of sales, decreased to 38.7% in 1995 from
45.8% in 1994. The decrease in cost of sales is primarily due to a reduction
in the charge related to the Inventory Valuation Adjustment to $0.9 million in
1995 from $3.9 million in 1994. Without the impact of this charge, cost of
sales would have increased 3.8% to $22.3 million in 1995 from $21.4 million in
1994. Cost of sales as a percent of sales would have decreased, however, to
37.2% in 1995 from 38.8% in 1994. The decrease in cost of sales as a percent
of sales was primarily due to higher margins on sales achieved through
international direct sales operations established during 1994 and early 1995
as well as an increase in the ratio of higher-margin disposable and
implantable products to equipment and instrumentation products. In 1995, 84.3%
of the Company's revenue was derived from disposable and implantable products
as compared to 82.7% in 1994. In addition, 1995 benefited from a full year of
expense savings generated from restructuring actions that took place following
the Xomed Acquisition in 1994. The restructuring involved the closure of a
Puerto Rico manufacturing facility.

Gross Profit. Historical gross profit as a percent of sales increased to
61.3% in 1995 from 54.7% in 1994 principally due to the effect of the change
in amortization related to the Xomed Acquisition accounting discussed
previously.

Combined gross profit as a percent of sales increased to 61.3% in 1995 from
54.2% in 1994 principally due to the effect of the Inventory Valuation
Adjustment related to the Xomed Acquisition accounting discussed previously.
Without the impact of this adjustment, gross profit as a percent of sales
would have increased to 62.8% in 1995 from 61.2% in 1994 for the reasons
described above.

Selling, General and Administrative Expenses. Historical selling, general
and administrative expenses increased 41.6% to $27.1 million in 1995 from
$19.1 million in 1994. Of the increase, $5.4 million or 67.8% represents the
inclusion of Xomed-Treace's operations for the full year 1995 as compared to
eight and one-half months in 1994. The balance of this increase is due to
issues discussed below.

26
<PAGE>

Combined selling, general and administrative expenses increased 10.5% to
$27.1 million in 1995 from $24.5 million in 1994. The increase was primarily
due to higher international expenses related to the establishment of direct
sales operations in Canada, Australia, the United Kingdom and France during
the latter part of 1994 and early 1995 and expenses associated with the
integration of the prosthetic implant devices and ventilation tube product
lines acquired during the year in the Otology Acquisition. This increase was
partially offset by a full year of savings generated from restructuring
actions taken during 1994 to reduce administrative overhead. Selling, general
and administrative expenses increased as a percent of sales to 45.3% in 1995
from 44.3% in 1994.

Research and Development. Historical research and development expenses
increased 22.8% to $2.4 million in 1995 from $2.0 million in 1994 principally
as a result of the inclusion of Xomed-Treace's operations for the full year
1995 as compared to eight and one-half months in 1994. The increase was
partially offset by savings from restructuring actions implemented in 1994.
Combined research and development expenses decreased 9.2% to $2.4 million in
1995 from $2.7 million in 1994. As a percent of sales, combined research and
development expenses decreased to 4.0% in 1995 from 4.8% in 1994. This
reduction represents a full year of savings from restructuring actions taken
in late 1994 to eliminate overhead in the research and development area.
Actual spending on research and development projects was comparable between
the two years.

Amortization. Historical amortization decreased 2.8% to $2.6 million in 1995
from $2.7 million in 1994. The net decrease represents an increase due to the
inclusion of Xomed-Treace's operations for the full year 1995 as compared to
eight and one-half months in 1994 which was more than offset by International
Distribution Rights Amortization that was greater in 1995 than in the 1994
period.

Combined amortization expense of $2.6 million in 1995 was $0.4 million lower
than the $3.0 million incurred in 1994. The net decrease is due to lower
amortization of International Distribution Rights Amortization in 1995 which
was partially offset by increased amortization expense related to the
approximately $56 million of goodwill created in the Xomed Acquisition in
April 1994. The goodwill from this transaction is being amortized over 25
years.

Interest and Other. Interest expense increased 42.6% to $3.1 million in 1995
from $2.1 million in 1994 principally as a result of incurring a full year of
interest expense in 1995 related to the Xomed Acquisition in April 1994. Other
income of $0.3 million in 1994 represented royalty income from a product
licensed to a third party.

Income Taxes. An historical tax provision of $1.4 million was recorded in
1995 compared with a tax benefit of $0.8 million in 1994. The tax benefit in
1994 was primarily due to losses generated by amortization expenses related to
the Xomed Acquisition in that year.

A combined tax provision of $1.4 million was recorded in 1995 compared with
a tax benefit of $0.6 million in 1994. The tax benefit in 1994 was primarily
due to losses generated by amortization expenses related to the Xomed
Acquisition in that year. The effective tax rate increased to 81% in 1995 from
32% in 1994 primarily due to losses incurred by foreign direct sales
subsidiaries in 1995 during their start-up stages whose related tax benefits
were not recorded due to uncertainty about their ultimate realization.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

The principal reason for the increases in the Company's historical operating
data for 1993 to 1994 is the effect on results of operations and the related
balance sheet data of the Xomed Acquisition in April 1994. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and Note 1 to Notes to Consolidated Financial Statements.

27
<PAGE>

Net Sales. Combined net sales decreased slightly to $55.3 million in 1994
from $55.4 million in 1993. The decrease was the result of distribution
channel changes and disruptions during 1994 related to the Xomed Acquisition
in April 1994 and a subsequent sales force restructuring which resulted in
sales force turnover and lost revenues. In addition, during 1994 the medical
device industry in general experienced a slowdown as a result of concern over
healthcare reform. During this time, capital equipment purchases were
postponed and the number of surgical procedures performed in various
subspecialties grew slower or declined relative to historical levels. Despite
these factors, the Company's core businesses grew 2.1% worldwide in 1994 over
1993 primarily due to the Merocel fluid-control products and the international
otology product line. International sales increased 13.2% during the year and
represented 25.9% of the Company's revenue in 1994 compared to 22.9% in 1993.

Cost of Sales. Combined cost of sales increased 7.4% to $25.3 million in
1994 versus $23.6 million in 1993. As a percent of combined sales, combined
cost of sales increased to 45.8% in 1994 from 42.5% in 1993. The dollar and
percentage increase in cost of sales resulted primarily from the inclusion in
1994 of $3.9 million of charges related to the Inventory Valuation Adjustment.
Without the impact of this adjustment, combined cost of sales would have
decreased 9.1% to $21.4 million in 1994 from $23.6 million in 1993 and
combined cost of sales as a percent of combined sales would have decreased to
38.8% in 1994 from 42.5% in 1993. This decrease in combined cost of sales as a
percent of combined sales was due primarily to higher margins on sales through
international direct sales operations established during 1994, a larger
percentage of higher margin disposable and implantable products (82.7% of the
Company's revenue in 1994 compared to 78.9% in 1993), as well as the partial
year impact of the restructuring that took place during 1994 following the
Xomed Acquisition. The restructuring actions involved the closure of a Puerto
Rico manufacturing plant.

Gross Profit. Combined gross profit as a percent of combined sales decreased
to 54.2% in 1994 from 57.5% in 1993. Excluding the Inventory Valuation
Adjustment expense of $3.9 million in 1994 related to the Xomed Acquisition,
combined gross profit as a percent of combined sales would have increased to
61.2% in 1994 from 57.5% in 1993 as a result of the factors discussed above.

Selling, General and Administrative Expenses. Combined selling, general and
administrative expenses increased 15.9% to $24.5 million in 1994 from $21.1
million in 1993. The increase was primarily due to higher international
expenses related to the establishment of direct sales operations in Canada and
Australia during the latter part of 1994. In addition, the Company incurred
increased administration costs for legal and accounting and treasury services
to maintain Xomed-Treace as an independent corporation rather than a division.
These increases were somewhat offset by a partial year of savings from
restructuring actions that took place during 1994 to reduce overhead. As a
percent of combined sales, combined selling, general and administrative
expenses increased to 44.3% in 1994 from 38.1% in 1993 for the reasons
described above.

Research and Development. Combined research and development expenses
decreased 13.9% from $3.1 million in 1993 to $2.7 million in 1994. This
reduction represents a partial year of savings from restructuring actions
taken in late 1994 to eliminate overhead in the research and development area.
Actual spending on research and development projects in 1994 was comparable
with the prior year.

Amortization. Combined amortization expense increased to $3.0 million in
1994 from $1.2 million in 1993. The majority of the amortization expense in
1994 relates to goodwill generated from the Xomed Acquisition in April 1994,
which is being amortized over 25 years. In addition, 1994 included
approximately $0.8 million of International Distribution Rights Amortization
that was related to international distribution agreements with Bristol-Myers,
the former owner of Xomed-Treace. A portion of the excess cost of the Xomed
Acquisition over the fair market value of the net assets acquired was
allocated to these international distribution agreements.

Interest and Other. Combined net interest expense was $2.1 million in 1994
as compared with interest income of $0.1 million in 1993. The interest expense
in 1994 primarily relates to the Term Loan

28
<PAGE>

and the Revolving Credit Facility that were established in April 1994 in
connection with the Xomed Acquisition as described below under "--Liquidity
and Capital Resources."

Combined other income of $0.3 million in 1994 compared to $0.4 million in
1993 and was related to royalty income from a product licensed to a third
party.

Income Taxes. The combined provision for income taxes decreased to a benefit
of $0.6 million in 1994 from a provision of $2.5 million in 1993. The
effective tax rate decreased to 32% in 1994 from 38% in 1993 principally due
to losses incurred by foreign direct sales subsidiaries during their start-up
stages whose related tax benefits were not recorded due to uncertainty about
their ultimate realization.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its operations (including capital
expenditures) through cash flows from operations. Since the Xomed Acquisition
in April 1994, which was financed in part by the incurrence of $45.9 million
of debt under the Term Loan and the Revolving Credit Facility, all cash flow
generated from operations has been applied to repay the outstanding principal
on the Term Loan or the Revolving Credit Facility. By June 29, 1996, the
aggregate principal balance of the Term Loan and the Revolving Credit Facility
had been reduced to $35.0 million.

During the six months ended June 29, 1996, the Company generated cash from
operating activities of $1.4 million as compared with $4.4 million in the
prior comparable period. In the first half of 1996, the Company used $2.0
million of cash to increase inventories while in the prior comparable period,
the Company generated cash from inventory reductions of $1.4 million. The
inventory increase in 1996 principally related to new products introduced
during the latter part of 1995 and early 1996. In addition, the restructuring
expense of $3.1 million recorded during the first half of 1996 lowered cash
flow from operations by $0.6 million after taking into account the increase in
accrued restructuring costs of $2.5 million. During 1995, the Company
generated cash flow from operations of $6.3 million compared with $4.0 million
in 1994. The change in cash flow between the years relates principally to the
inclusion of the operations of Xomed-Treace for eight and one-half months in
1994 as compared with a full year in 1995. Working capital at June 29, 1996
was $11.1 million as compared with $10.4 million at July 1, 1995. The increase
in working capital relates principally to an increase in inventory which was
partially offset by increases in accrued restructuring costs and the current
portion of long-term debt. Working capital at December 31, 1995 was $12.2
million as compared to $12.7 million at December 31, 1994. The Company
believes cash flow from operations combined with the amounts available for
borrowing under the Revolving Credit Facility will be sufficient to finance
working capital needs during the next twelve months.

Cash generated in investing activities was $0.5 million in the first half of
1996 as compared to cash used in investing activities of $1.4 million in the
prior comparable period. During the second quarter of 1996, the Company
acquired TreBay by issuing preferred stock. The assets acquired in this
transaction included $2.0 million in cash, which is reported as a source of
cash from investing activities. In addition, certificates of deposit related
to a foreign subsidiary matured during the first half of 1996 generating $0.3
million in cash. Capital expenditures were $1.7 million during each of the
first half of 1996 and 1995 and related principally to purchases of
manufacturing equipment. Cash used in investing activities was $4.0 million in
1995 as compared with $83.4 million in 1994, during which period $80.9 million
related to the Xomed Acquisition.

Cash used in financing activities was $1.7 million in the first half of 1996
as compared with $2.9 million in the first half of 1995. In general, all cash
generated from operations that is not used in investing activities is used to
reduce outstanding debt under the Term Loan and the Revolving Credit Facility.
Cash used in financing activities in 1995 of $2.1 million compared with cash
provided by financing activities of $78.3 million in 1994, during which period
cash was received from the establishment of the Term Loan and the Revolving
Credit Facility as well as from the issuance of preferred stock related to the
Xomed Acquisition.

29
<PAGE>

Under the terms of the Revolving Credit Facility, the Company may borrow up
to $14.0 million for working capital and operating needs. The amount available
to the Company at any given time is based upon various percentages of the
Company's outstanding inventories and accounts receivable as determined
periodically throughout the year (the "Borrowing Base"). Any excess of the
principal amount outstanding under the Revolving Credit Facility over the
Borrowing Base must be repaid by the Company. The outstanding principal under
the Revolving Credit Facility is due and payable on April 15, 1999. Management
expects that the Borrowing Base will remain at a level for the next twelve
months that will not require the Company to make any repayments of principal
outstanding under the Revolving Credit Facility during such period. At August
1, 1996, the Borrowing Base under the Revolving Credit Facility was $13.8
million, of which $12.0 million was outstanding and $1.8 million was available
for additional borrowing. The Revolving Credit Facility is secured by
substantially all the assets of the Company, contains restrictions regarding
payment of dividends, incurrence of additional debt and capital expenditures
and requires compliance with various financial covenants.

The Company was not in compliance with certain financial covenants of the
Term Loan and Revolving Credit Facility as of December 31, 1995, March 30,
1996 and June 29, 1996 for which waivers were obtained on September 3, 1996.
The noncompliance resulted primarily from (i) the one-time $3.1 million charge
associated with the restructuring actions taken by the Company in the second
quarter of 1996; and (ii) the one-time $3.6 million charge in the second
quarter of 1996 for costs allocated to in-process research and development in
connection with the acquisition of TreBay. In conjunction with the waivers,
the Company obtained amendments to the financial covenants contained in its
Term Loan and Revolving Credit Facility that, among other things, offset the
effect of the foregoing one-time charges.

Of the net proceeds of this offering, $20.7 million will be used to repay
the entire principal amount of and accrued interest on the Term Loan. The
Company will use the balance of the net proceeds of this offering, after
repayment of the Term Loan, plus the net proceeds from the sale of any shares
covered by the Underwriters' over-allotment option, for the redemption of up
to a maximum of $25.0 million of Series C Redeemable Preferred Stock. In the
Share Exchange, all shares of Series C Redeemable Preferred Stock remaining
outstanding immediately following the redemption will be exchanged for shares
of Common Stock, with the number of shares of Common Stock to be issued in
such exchange to be determined by dividing the aggregate redemption price of
such Series C Redeemable Preferred Stock, plus accrued but unpaid dividends,
by the per share initial public offering price. Based upon an assumed initial
public offering price of $20.00 per share, 239,234 shares of Series C
Redeemable Preferred Stock having an aggregate redemption price of $25.0
million would be redeemed and the remaining 60,225 shares of Series C
Redeemable Preferred Stock would be exchanged in the Share Exchange for
314,650 shares of Common Stock.

30
<PAGE>

BUSINESS

OVERVIEW

Xomed is a leading developer, manufacturer and marketer of surgical products
for use by ENT specialists. The Company offers a broad line of products in its
core ENT market that includes powered tissue-removal systems and other
microendoscopy instruments, implantable devices, nerve monitoring systems and
disposable fluid-control products. The Company also offers a line of
ophthalmic and other products. For the first half of 1996, approximately 86%
of Xomed's revenues were derived from disposable or implantable products. The
Company distributes its products on a worldwide basis through a 62-person
direct sales organization in the U.S. and selected other countries and through
a network of 121 independent distributors. Xomed is the only major
manufacturer and marketer of ENT surgical products with a direct U.S. sales
force exclusively serving ENT specialists. Approximately 34% of Xomed's
combined net sales was derived from international markets during the first
half of 1996, as compared to 23% of its combined net sales in 1993. With over
25 years of industry experience, Xomed believes that it has established a
long-standing reputation for innovative, high-quality products and is uniquely
positioned as the only major surgical products company focused on the ENT
market.

Xomed believes that the ENT market is beginning a conversion from
conventional surgical approaches to less-traumatic approaches that involves
the use of advanced surgical tools, such as powered tissue-removal systems and
small-diameter surgical endoscopes, thereby minimizing patient trauma and
reducing procedure times. Xomed believes that the adoption of these less-
traumatic techniques may be driven by several factors, including economic
pressures and patient demand. Minimally invasive techniques have the potential
to expand the number of ENT procedures that can be performed in lower-cost
outpatient or day surgery settings. Patient demand is likely to increase due
to the reduced morbidity and improved outcomes. Xomed believes that the
conversion in the ENT market to less-traumatic approaches will be similar to
recent conversions in the general surgery market to less invasive techniques
and the orthopaedic surgery market to powered instrumentation systems.

INDUSTRY BACKGROUND

An estimated 15,000 ENT specialists, also known as otorhinolaryngologists,
currently practice in the U.S., Canada, Western Europe, Japan, Australia,
South America and the Middle East (collectively, "worldwide"), with
approximately 58% or 8,700 of those specialists practicing in the U.S. The
Company estimates that sales in the U.S. market for medical instruments,
devices and supplies used by ENT surgeons were approximately $200 million in
1995. ENT practitioners specialize in the diagnosis and treatment of diseases
and conditions affecting the ear, nose and throat. ENT surgeons are also
typically experts in tumor-related diseases of the head and neck.
Increasingly, ENT surgeons are expanding their practice to include facial
plastic and reconstructive surgery. Of the estimated 15,000 ENT specialists
worldwide, an estimated 4,000 currently practice facial plastic and
reconstructive surgery.

Diseases and conditions addressed by ENT specialists affect sizable patient
populations. The Company estimates that ENT surgeons performed over three
million procedures in the U.S. in 1995. The following chart summarizes common
conditions currently treated by ENT surgeons, the Company's estimates of the
patient populations affected by these conditions in the U.S., as well as the
Company's estimates of the number of procedures performed in the U.S. in 1995.

31
<PAGE>

<TABLE>
<CAPTION>
U.S. PATIENT
POPULATION NUMBER OF
ENT WITH PROCEDURES IN
SUBSPECIALTY INDICATION/CONDITION CONDITION PROCEDURE U.S. IN 1995
------------ -------------------- ------------ --------- -------------
<C> <S> <C> <C> <C>
Sinus and Chronic sinusitis (sinus 30,000,000 Sinus surgeries* 320,000
Rhinology (nose) inflammation)
Cosmetic reconstruction, Elective Septoplasty/rhinoplasty 270,000
trauma or congenital
defects
Head and Neck Chronic infection of 600,000 Tonsillectomy/adenoidectomy 300,000
tonsils or adenoids
Vocal cord polyps or 175,000 Surgical removal 175,000
lesions
Acoustic neuromas or 75,000 Skull-base surgery 75,000
mastoid infection
Facial tumors 35,000 Surgical resection 35,000
Facial cosmetic Elective Face lifts/facial sculpting/ 700,000
augmentation brow lifts and others
Chronic snoring or sleep Elective Uvulopharyngoplasty 100,000
disorders
Otology (ear) Acute otitis media 2,000,000 Myringotomy with vent tubes 1,000,000
(middle ear infection)
Conductive hearing loss 60,000 Middle ear reconstruction 60,000
</TABLE>
- --------
* Sinus surgeries include removal of polyps (polypectomy) and removal of
diseased and inflamed tissue (ethmoidectomy and sinusotomy).

Based on the ratio of ENT specialists in the U.S. to ENT specialists
worldwide, the Company estimates that in general the number of ENT procedures
performed in the U.S. represents approximately 60% of the total procedures
performed worldwide and believes that significant opportunities exist in the
ENT market outside the U.S.

MARKET OPPORTUNITY

ENT procedures currently pose the following challenges:

(i) In many of these procedures, the target tissue is adjacent to critical
anatomy, including the brain, sensory centers and facial motor nerves,
limiting the surgeon's maneuverability and requiring very small,
precise movements;

(ii) The anatomy in the region generally contains many blood vessels,
leading to significant blood loss during surgery that may obscure the
surgeon's vision, as well as increase patient complications, or
morbidity;

(iii) The affected areas are often very small in size and require the
surgeon to perform microsurgery through the use of magnifying devices
such as small-diameter surgical endoscopes ("microendoscopy"); and

(iv) The affected areas are often behind significant bony structures,
including the skull, the penetration of which can entail significant
patient trauma and lengthy procedure times.

Conventional hand-held surgical instruments typically used during ENT
procedures do not provide the surgeon with sufficient power or precision to
minimize trauma and blood loss during the procedure and can contribute to
unnecessary pain, swelling and scarring following the procedure. In addition,
the need to repeatedly remove and reinsert conventional hand-held
instrumentation from the surgical site during procedures can increase patient
trauma and operating time. The Company believes that the limitations of
conventional hand-held surgical instruments create a significant opportunity
for the development of instruments designed for specific ENT procedures,
including powered tissue-removal instrumentation and visualization products,
that will make these procedures easier and faster to perform and less
traumatic to the patient.

32
<PAGE>

The Company believes that the following factors will drive growth in the
market for surgical instruments, devices and supplies for ENT surgeons:

Advancements in Procedure-Specific Instrumentation. The Company believes
that the introduction of new tools and instrumentation will enable ENT
surgeons to better address the current challenges of ENT procedures. For
example, powered cutting devices adapted for use in particular surgical
procedures will allow surgeons to cut and extract tissue and penetrate bone
with more speed, control and precision than conventional hand-held
instruments, thereby minimizing patient trauma and reducing procedure times.
The Company anticipates that the blades for these newly developed powered
cutting devices will be disposable and thus sales of these blades will
represent a significant portion of the market growth of these devices. By
providing ENT surgeons with greater access to difficult-to-reach surgical
sites and reducing trauma to the patient, new procedure-specific instruments
potentially will increase the total number of procedures performed.

Clinical and Cost Benefits for Patient, Surgeon and Payor. The Company
believes that the adoption of these less-traumatic ENT procedures may be
driven, in part, by economic pressures. Due to the reduced patient morbidity
associated with less-traumatic techniques, certain procedures previously
performed in hospitals and requiring longer stays can now be performed in
lower-cost outpatient or day surgery settings. In addition, powered tissue-
removal instrumentation allows for reduced operating times.

Demand From Significant Patient Populations. Sizable patient populations
suffer from conditions which can be treated by ENT surgical procedures. As
less-traumatic instrumentation and techniques become available, the portion of
these patients who will elect to undergo these procedures is likely to
increase. In particular, patient demand for endoscopic sinus surgery as well
as facial plastic surgery will, in the Company's view, increase as the pain
and morbidity associated with these procedures is reduced through better
instrumentation and techniques.

Ease of Market Conversion. The Company believes that ENT surgeons will
readily adopt new devices and instrumentation designed to meet the challenges
of specific surgical procedures because of the advantages they offer over
conventional instrumentation. The Company further believes that physicians
will require minimal additional training (usually two to three days) to use
these instruments. In addition to its functional advantages, powered
instrumentation should, in the Company's view, be attractive to ENT surgeons
because it requires only a relatively modest capital investment.

STRATEGY

The Company's objective is to enhance its position in the ENT market. The
principal elements of its strategy to meet this objective are outlined below.

Focus on the ENT Market. The Company believes that, as the only major
provider of surgical products with a direct sales force exclusively serving
the ENT surgeon, it is well-positioned to participate in any growth in the ENT
surgical market. The Company intends to continue to develop and maintain close
relationships with ENT specialists from whom it has gained significant brand
recognition and loyalty. The Company believes that it presently sells products
to substantially all the ENT specialists in the U.S. Accordingly, the Company
believes that a significant opportunity exists to increase penetration of its
existing customer base.

Facilitate ENT Market Conversion to Less-Traumatic Approaches. The Company
believes that the ENT market is beginning a conversion to less-traumatic
approaches that is similar to recent conversions in the general surgery market
to less invasive techniques and the orthopaedic surgery market to powered
instrumentation systems. The Company intends to facilitate conversion of high
volume ENT procedures to less-traumatic techniques. The procedures targeted by
the Company include sinus surgery, the removal of tonsils and adenoids, face
and brow lifts and facial sculpting. To facilitate this conversion, the
Company

33
<PAGE>

plans to continue its collaborative efforts with leading ENT surgeons to
create products that allow physicians to re-engineer standard operating
procedures to reduce patient trauma and operating time. The Company believes
that the development of powered tissue-removal instrumentation systems for use
in ENT procedures will play a central role in this conversion and accordingly
will continue in its efforts to develop and introduce such powered
instrumentation.

Continue to Innovate; Emphasize Internal Research and Development. The
Company plans to develop new proprietary products and product enhancements
primarily through internal research and development efforts. The Company
expects that it will invest approximately $3.7 million in research and
development in 1996. The Company has introduced numerous technological
advancements in the ENT market.

Maintain a Broad Line of ENT Products; Emphasize Disposable and Implantable
Products. The Company seeks to maintain a broad product line that addresses
all of the surgical needs of ENT specialists. The Company's current product
line consists of approximately 4,000 stock keeping units (SKUs), including
equipment, disposable products and implantable devices. The Company places
particular emphasis on disposable products and implantable devices, which
represented 86% of sales during the first half of 1996, as compared with 79%
of sales in 1993. One of the Company's principal objectives is to continue to
develop additional disposable products for use with its instrumentation
systems.

Continue to Expand its Global Distribution Network. The Company believes
that significant growth opportunities exist through the expansion of its
global distribution network. The Company distributes its products worldwide
through a 62-person direct sales force in the U.S. and selected other
countries and through a network of 121 independent distributors. The Company's
core ENT products are sold in the U.S. only on a direct sales basis.
Approximately 29% of the Company's net sales in 1995 and 34% of its net sales
in the first half of 1996 were made outside the U.S. through direct operations
in the United Kingdom, Canada, France, Germany and Australia, as well as
through 102 independent international distributors, many of whom distribute
the Company's products exclusively.

MAJOR ENT SUBSPECIALTIES

The three major ENT subspecialties are sinus and rhinology, head and neck
and otology. The following table sets forth the Company's estimate of sales in
the U.S. market in 1995 for surgical instruments and related products used in
procedures within each of these subspecialties:

<TABLE>
<CAPTION>
1995 U.S. SALES OF
SURGICAL PRODUCTS
SUBSPECIALTY USED IN SUBSPECIALTY
------------ --------------------
<S> <C>
Sinus and Rhinology $87 million
Head and Neck $78 million
Otology $36 million
</TABLE>

SINUS AND RHINOLOGY

The majority of surgical procedures within the sinus and rhinology
subspecialty address disease and inflammation of the sinuses, due to enlarged
tissue, deviated septum, infection, trauma or allergies.

Endoscopic Sinus Surgery. An estimated 15% of the U.S. population, or
approximately 30 million people, suffer from chronic sinusitis. Although sinus
medications provide temporary relief from symptoms, they may not resolve the
underlying cause of the disease or inflammation and surgery is frequently
required. ENT specialists utilize several methods of treatment, including
medication and surgical intervention, to provide patients with symptomatic
relief of sinus disease. In traditional sinus surgical procedures, surgeons
remove the affected tissue or obstruction, such as a polyp, through the use of
forceps. However, with traditional surgical instruments, ENT surgeons may have
limited ability to

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visualize and gain access to the deeper sinus cavities through the natural
sinus passageways and also experience significant difficulty gaining the
control needed to remove the tissue effectively. This can result in uneven
cutting and tearing, which in turn causes trauma to the surrounding tissue. In
some cases, bony structures and tissue obstruct the nasal passageway, further
complicating the procedure.

Although a less-traumatic method for performing sinus surgery with powered
tissue-removal instrumentation was introduced in 1993, much of the
instrumentation used at the time was originally designed for arthroscopic
procedures (less invasive knee surgery). Since this instrumentation was not
designed specifically for sinus surgery, its use for these procedures was
cumbersome and prone to clogging. Despite these limitations, approximately 20%
of all sinus surgeries in the U.S. were performed with this less-traumatic
method in 1995. Overall operating time of procedures performed with this
method can be reduced by approximately 25% from that of traditional surgical
methods due to the greater ease of accessing structures, the improved
visualization at the site and the quicker removal of tissue with powered
instrumentation.

Rhinoplasty and Septoplasty. Rhinoplasty involves the surgical
reconstruction of the nose to treat bone defects or trauma or to improve the
appearance of the nose cosmetically. ENT surgeons generally use either a bone
shaver or a rasp to shape or reduce the targeted area or a chisel to cut the
bone. The use of a shaver or rasp results in significant post-operative
swelling and the use of a chisel carries with it a significant risk of error.
Septoplasty, the surgical correction of a defect, disease or trauma to the
septum, is often done in conjunction with sinus surgery or rhinoplasty.

HEAD AND NECK

The head and neck subspecialty encompasses a wide range of procedures,
including laryngeal (throat) surgery, skull-base surgery, facial tumor removal
and facial plastic surgery.

Laryngeal Surgery. Throat-based procedures include the removal of the
tonsils (tonsillectomy) and adenoids (adenoidectomy), the removal of lesions,
polyps and tumors on the throat or vocal cords and the surgical reduction of
the uvula (the flap of tissue at the back of the throat and the soft palate).

Tonsillectomies and adenoidectomies, which are performed to treat chronic
inflammation and soreness, represented approximately 300,000 procedures in the
U.S. in 1995, less than 10% of which are estimated by the Company to have been
performed using powered tissue-removal instrumentation. In traditional
tonsillectomies, surgeons use either forceps or snares to grasp and pull the
tonsils out, or alternatively they cut away the tonsils with an electrocautery
device. The use of these instruments can cause swelling, pain and post-
operative bleeding. For adenoidectomies, surgeons traditionally utilize a
curette, a small hand instrument, to scrape out the inflamed tissue. Due to
the limited precision of a curette in removing this tissue, adenoidectomies
involve many of the same problems experienced in tonsillectomies.

Lesions, polyps or tumors on the throat or vocal cords are presently removed
using either hand instrumentation, an electrocautery device or a laser. The
use of hand instrumentation, electrocautery devices or lasers may result in
damage to the surrounding tissue. In addition, lasers and electrocautery
devices can destroy the affected tissue and thus prevent the subsequent
pathological testing of a tissue sample.

Uvulopharyngoplasty is a procedure in which the uvula and the soft palate
are surgically reduced in the throat to reduce snoring and breathing
interruptions (sleep apnea). The use of electrocautery devices or lasers to
perform this procedure is again associated with swelling and pain.

Skull-base Surgery. Skull-base surgery includes those procedures in which
the affected anatomy, generally a tumor, is located within or near the skull.
A common skull-base procedure is the removal of

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an acoustic neuroma, a benign tumor located on the cranial nerve adjacent to
the inner ear. This condition afflicts approximately 20,000 people each year
in the U.S., and symptoms include hearing loss, ringing in the ears, loss of
balance, pain and headaches. Surgical removal is the only treatment
alternative for persons with an acoustic neuroma; however, the traditional
procedure involves drilling through the dense bone behind the ear to access
the nerve, a procedure that generally takes between six to eight hours to
perform and frequently results in a residual hearing loss.

Facial Tumor Removal. ENT surgeons perform numerous procedures in order to
remove facial tumors from the head and neck area. Surgical resections in this
area are particularly critical procedures to perform because of the numerous
motor nerve branches within the surgical area. Due to the potential
complications from severing a nerve, the identification and monitoring of
nerves during most facial tumor procedures are becoming a standard of care.
These surgeries frequently require laser incisions in cosmetically important
areas and post-operative cosmetic and functional defects are common.

Facial Plastic Surgery. Nearly one-third of ENT surgeons in the U.S.
currently perform facial plastic procedures. The number of elective procedures
for cosmetic purposes is likely to increase in conjunction with the general
aging demographic trend of the U.S. The procedures covered in this area
include: the placement of facial implants to correct defects or augment
features in the face; correction and smoothing of wrinkles; facial lifts,
which involve stretching the muscles and skin of the face; and facial
sculpting, which involves the removal of fat around the neck. The Company
estimates that less than 10% of the facial sculpting in the U.S. presently is
performed using powered tissue-removal instrumentation.

Approximately 700,000 facial cosmetic augmentation procedures were performed
in the U.S. in 1995, of which face and brow lifts represented approximately
145,000. During this procedure, the surgeon peels the skin at the hair line,
pulls the facial muscles and skin taut and then stitches the long incision
made at the hair line. In addition to the post-operative swelling and bruising
from the procedure, the patient is left with a relatively large scar at the
hair line from the long incision needed to access the entire facial region.
During facial sculpting, the surgeon removes fat away from the neck area using
a suction cannula, a device which evacuates fat from the facial tissue. As a
result of the aggressive way in which the suction cannula evacuates the fat
from the neck area, the patient experiences significant swelling and bruising
following the surgical procedure.

OTOLOGY

Common otology procedures include myringotomies (which generally involve the
insertion of ventilation tubes in the middle ear) and stapedectomies (the
replacement of middle ear bones with middle ear prosthetic implants).

Ventilation tubes are used to treat chronic middle ear infection. Their
placement is one of the most common surgical procedures performed in children,
with over 1.0 million of these procedures performed in 1995 in the U.S.
Conductive hearing loss is caused by damage to the ossicular bone chain in the
middle ear from disease, trauma or aging. The replacement of diseased bones of
the middle ear with specially designed implants is the preferred method to
restore hearing to these patients, and over 60,000 reconstructive middle ear
procedures are performed in the U.S. each year. Re-engineering in the design
and material of the prostheses has, in recent years, improved surgeon
technique and patient hearing outcomes.

PRODUCTS

The Company designs, develops, manufactures, and markets surgical
instruments and related disposables and accessories for use by ENT surgeons.
The Company believes its broad product lines focused on ENT procedures allow
it to be a complete provider to its ENT customer base. The Company also
designs, develops and manufactures surgical products for use during ophthalmic
and orthopaedic procedures. Set forth below is a description of the Company's
products by related subspecialty:

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SINUS AND RHINOLOGY

Approximately 28% of the Company's net sales in 1995 and 33% of its net
sales in the first half of 1996 were derived from a broad line of powered
tissue-removal instrumentation systems, visualization products, fluid-control
products and hand instruments designed for microendoscopic sinus surgery. The
Company has devoted a significant portion of its investment in research and
development to the development of procedure-specific products to capitalize on
and facilitate the conversion to microendoscopic sinus surgery.

Powered Tissue-Removal Instrumentation Systems. To date, the most
significant product innovation facilitating the conversion of sinus procedures
to less-traumatic techniques has come from the introduction of powered
instrumentation designed for ENT procedures. In 1995, the Company introduced
the first powered microdebrider product designed exclusively for use in ENT
procedures. The Company's Wizard Plus product cuts soft tissue and bone
through a unique oscillating blade design powered by a small, lightweight,
surgical handpiece. This system, which employs disposable blades, enables the
surgeon to target and remove diseased tissue endoscopically with less trauma
to adjacent healthy tissue and less bleeding. Integrated suction and
irrigation aid in cutting and removal of the tissue, and reduce the incidence
of blade clogging. In 1995, the Company introduced the Typhoon family of
disposable endoscopic blades for use with most competitors' power handpieces.
The Company anticipates introducing in the fourth quarter of 1996 its XPS
powered tissue-removal system. This new system, which will employ disposable
blades, will offer the ENT surgeon significantly increased power with limited
blade clogging.

Visualization Products. The Company produces and distributes a competitive
line of visualization endoscopic equipment designed for use in less-traumatic
sinus, head and neck and otology surgery. These products include the Sharpsite
rigid endoscopes, Lightstar Xenon light source and Digistar Plus digital
enhanced camera system which were all introduced in October 1995. The Digistar
Plus camera system uses a single microchip along with digital enhancement to
produce picture quality approaching that of more expensive products using
three-microchip technology. Exclusive to the Company is its proprietary
EndoScrub(R) endoscope lens cleaning system, which was introduced in 1992 and
allows the ENT surgeon to clean a scope lens during surgical procedures
without the need to remove and reposition the scope repeatedly.

Merocel Fluid-Control Products. The Company maintains a strong franchise
with its proprietary disposable fluid-control products (surgical sponges),
developed with proprietary polymer technology to control blood loss and
simultaneously minimize adhesions at the surgical site. Under its Merocel
brand name, the Company markets its fluid-control products in a broad array of
sizes and shapes, designed primarily for use in sinus and rhinology
procedures.

Hand Instrumentation. In April 1996, the Company became the exclusive
distributor for BOSS Instruments, Ltd. in the U.S. ENT market, and as a result
now provides a complete line of sinus surgery hand instrumentation. Over 400
patterns have been developed to provide surgeons with an ergonomic design and
performance that affords surgeons precision during surgical procedures.

Rhinology Products. The Company's products for use during surgical repair of
the nose include internal and external nasal splints, nasal catheters and
airway and irrigation catheters.

HEAD AND NECK

Approximately 24% of the Company's net sales in 1995 and in the first half
of 1996 were derived from products and devices related to the head and neck
anatomy. The Company has a strong brand franchise in this product subspecialty
with its nerve monitoring, powered systems and facial plastic implant
products. Surgical techniques are being developed in the head and neck
subspecialty which use the more precise tissue removal of powered
instrumentation systems, similar to those being used in sinus

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surgery, to lessen trauma and bleeding. The Company believes there is
significant opportunity to capitalize on and facilitate the conversion of this
subspecialty to these new techniques.

Powered Tissue-Removal Instrumentation Systems. The Company is currently
developing powered tissue-removal instrumentation systems for use in various
head and neck procedures that incorporate the Company's technology for its
powered sinus tissue-removal instrumentation systems. These powered systems
are being designed for use in uvulopharyngoplasty and facial sculpting as well
as in the removal of polyps, lesions and tumors located on the vocal cords.
The Company anticipates that these powered systems will employ disposable
blades. In the case of vocal cord polyps, the Company believes that these new
procedures will not only decrease patient trauma associated with existing
methods but will also, unlike lasers and electrocautery devices, enable
samples of the affected tissue to be tested pathologically following surgical
removal. In the cases of uvuloplasty and facial sculpting, the Company
believes that the use of less-traumatic procedures employing powered tissue-
removal will increase patient demand for these procedures.

Powered Drill Systems. Precision, high-powered drilling is required in head
and neck surgery to access tumors or tissue behind bone structures. The
Company manufactures and markets a line of electric and air powered drilling
systems for such procedures, including the MPS 2000(R) electric drill system
which consists of a power console, surgical handpiece and disposable and
reusable cutting burrs. The Company anticipates introducing in the fourth
quarter of 1996 its Powerforma drill system to replace the MPS 2000(R)
electric drill system. This new system, which will employ disposable and
reusable cutting burrs, will provide the ENT surgeon with significantly
increased cutting speed and precision that will reduce the time necessary to
complete these head and neck surgical procedures.

Nerve Monitoring Systems. The Company's NIM-2(R) XL nerve monitor products,
which were first introduced in February 1995, identify and monitor crucial
motor nerve branches during various head and neck procedures. The
identification of nerves during many head and neck procedures is becoming a
standard of care because the inadvertent cutting of any branches of these
nerves could result in facial paralysis. The NIM-2(R) XL provides surgeons
with visual and audio indicators through a system which includes a battery-
powered electromyographic (EMG) monitor, disposable electrodes and nerve
stimulators.

Facial Plastics Products. Increasingly, ENT surgeons are performing more
facial plastic procedures, including face and brow lifts, facial sculpting and
cosmetic facial implants. The Company provides a broad array of products and
devices for the facial plastic market. In December 1995, the Company became
the exclusive worldwide distributor for Implantech Associates, Inc. in the ENT
market, and as a result now provides a broad line of facial plastic implants,
including implants to augment the chin, nose and cheek.

Hand Instrumentation. As the exclusive distributor for BOSS Instruments,
Ltd. in the U.S. ENT market, the Company provides a broad line of hand
instrumentation for facial plastic surgery. These products are designed to
increase surgeon precision and reduce patient swelling and recovery time.

Specialty Products. The Company's Laser-Shield II(R) is a laser resistant
endotracheal tube used in throat-related surgery performed with lasers. The
Company believes that the Laser-Shield II(R) is safer and more reliable than
current alternatives.

OTOLOGY

Approximately 21% of the Company's net sales in 1995 and 23% of its net
sales in the first half of 1996 were derived from otology products. The
Company possesses a strong franchise and significant market share in this
segment of the ENT market. The Company's otology products include ventilation
tubes, middle ear implants and instrumentation used to repair conductive
hearing loss and correct other problems associated with the ear. The Company
believes that the conversion of ENT procedures to less-

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traumatic techniques is more likely to have a significant effect on the sinus
and rhinology and head and neck subspecialties than on the otology
subspecialty.

Ventilation Tubes. Vent tubes are small tubes surgically implanted into the
ear drum to provide ventilation to the middle ear. Vent tubes are primarily
used in younger children with severe middle ear infection. The Company markets
a full line of vent tubes, including its proprietary Activent anti-microbial
tube.

Middle Ear Implants. The Company develops and markets middle ear prostheses
used to reconstruct any or all of the three bones of the middle ear, primarily
in cases of otosclerosis and chronic middle ear infection. These permanent
implants are made of stainless steel, porous polyethylene, hydroxylapatite and
other bio-compatible materials.

Microsurgical Instruments. The Company sells a broad line of microsurgical
hand-held instruments such as otoscopes, vent tube inserters, disposable
blades, proprietary suction irrigators and specialized instruments to insert
and implant middle ear prostheses.

Specialty Products. The Company's specialty otology products include
absorbent dressings, ear plugs, ear protectors, disposable kits for ear
surgery and other disposable surgical instruments. They also include the
Company's proprietary Redi-Bur(R), the only disposable micro drill available
for ENT procedures. The Company also produces and markets the Skeeter(R)
otologic drill system which is designed for middle ear procedures.

OPHTHALMIC AND OTHER

Approximately 27% of the Company's net sales in 1995 and 20% of its net
sales in the first half of 1996 were derived from ophthalmic and other
products, with substantially all of such sales from ophthalmic products. The
Company develops and manufactures instruments and disposable products for use
during various ophthalmic procedures. These products are marketed under the
Solan trademark through distributors specializing in the ophthalmic products
market. These instruments include forceps, needle holders, hooks, probes and
scissors. The Company's disposable products relating to ophthalmic surgery and
procedures are micro knives, cannulae, trephines, blades, sponges, cauteries,
pen lights and other miscellaneous products and kits. The Company recently has
dedicated a senior executive to managing the marketing of its ophthalmic
products. In connection with its acquisition of TreBay in April 1996, the
Company acquired certain devices and disposable products for use during
orthopaedic surgery which the Company plans to market through distributors
under the TreBay name.

SALES AND MARKETING

The Company has an established worldwide distribution system with an ENT-
focused direct sales force, international distributor alliances and
independent distributors for select product specialties and geographic
markets.

The Company sells to substantially all of the approximately 8,700 ENT
specialists in the U.S. through its direct sales force. The Company is the
only major manufacturer and marketer of ENT surgical products with a direct
sales force exclusively serving ENT specialists. The Company's U.S. sales
force focuses its efforts on developing and maintaining business relationships
with ENT specialists and those surgeons at leading academic institutions who
are considered to be influential in the ENT field. The ability of the Company
to build and maintain these relationships within the medical community
provides a powerful base for the distribution network and what the Company
believes to be a significant competitive advantage, especially in the area of
product development. The Company's direct U.S. sales representatives are
compensated exclusively through sales commissions. The Company's nine
marketing personnel specialize according to subspecialty within the ENT market
as well as by category of product.

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<PAGE>

In the international market, the Company sells through both a direct sales
force and through distributors. The Company maintains a direct sales presence
in Canada, the United Kingdom, France, Australia and Germany. The Company
sells its products to other countries in Europe, Asia Pacific, Africa, Central
and South America using distribution partners. Prior to its divestiture from
Bristol-Myers in 1994, the Company shared sales and service personnel with
Zimmer International, a division of Bristol-Myers, in selected countries. The
Company believes it has experienced significant international sales gains as a
result of creating in certain markets a dedicated sales force focused
exclusively on selling its products.

The Company has an exclusive arrangement with the International Center for
Otologic Training (ICOT), an organization affiliated with the Georgia Ear
Institute in Savannah, Georgia. The charter of ICOT is to train
internationally-based ENT surgeons, many from developing countries, in new and
advanced ENT surgical techniques. The Company provides financial support to
the ENT surgeons attending ICOT in the form of partial tuition. As a result of
this relationship with the Company, the Company believes that these physicians
and their affiliated hospitals will be more inclined to purchase the Company's
products upon returning to their respective countries.

The Company utilizes specialty distributors to market its non-ENT products
in the U.S. The Company's Solan ophthalmic products are marketed in the U.S.
through a network of dealers specializing in ophthalmic product sales. Outside
of the U.S., the Solan ophthalmic product line is marketed through the same
direct and independent distributor system as the Company's ENT product lines.
The TreBay brand of orthopaedic products is marketed in the U.S. through
independent orthopaedic product distributors.

PRODUCT DEVELOPMENT

The Company believes that it has a strong base of proprietary engineering,
manufacturing and bio-materials capabilities. Although it has in the past
relied in part on strategic acquisitions and licensing of third-party
technology to develop a broad line of ENT products, the Company believes it
has gained expertise in the core research and development areas relevant to
the production of new ENT surgical products. Primarily through internal
research and development efforts, the Company plans to continue to develop new
proprietary products, often in collaboration with leading ENT surgeons, that
allow surgeons to perform their current or future procedures in a less-
traumatic manner with more precision, less surgical time and greater
simplicity. The Company believes that the strong network it has built through
its marketing focus on ENT specialists gives it a competitive advantage in
implementing this strategy. The Company also from time to time may evaluate
strategic acquisitions and licensing of third party technology to further
expand and enhance its product line.

The Company employs mechanical, electrical, materials and polymer engineers
to develop the various products offered or contemplated by the Company. The
Company's research and development department has a broad range of electro-
mechanical skills to address its variety of hand instruments, implants,
electrical powered systems, polymer products and disposable products.
Currently, the Company's research and development department consists of
eleven engineers experienced in various technical specialties that complement
the Company's core products.

The research and development engineers work closely with leading surgeons in
assessing new surgical procedures for opportunities to develop products that
will complement current products and new "state of the art" devices that fit
within the overall Company's business strategy of being the industry leader in
innovative microendoscopic instrumentation and implants. During 1993, 1994,
1995 and the first half of 1996, the Company spent $3.1 million, $2.7 million,
$2.4 million and $1.7 million, respectively, on a combined basis in connection
with research and development activities. However, actual spending on research
and development projects was comparable during these three years. The Company
expects that it will invest approximately $3.7 million in research and
development in 1996.

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SUPPLIERS

Although most of the purchased components utilized by the Company in
manufacturing are available from more than one vendor, certain materials,
including TPE-based materials used in its ventilation tubes and medical grade
silicone used in certain of its ventilation tubes and implants, are only
supplied by a single vendor. If the supply of materials from a single source
vendor were interrupted, replacement or alternative sources may not be readily
obtainable due to the regulatory requirements that the Company certify as to
the quality and suitability of the new or alternate material. In addition, a
new or supplemental filing would be required to be approved prior to the
Company's marketing a product containing new material. This approval process
may take a substantial period of time and there is no assurance that the
Company would be able to identify, certify or obtain the necessary regulatory
approval for the new material to be used in the Company's products. In
addition, certain suppliers could terminate or limit the sales of certain
materials to the Company for use in medical devices in an attempt to limit
their potential exposure to product liability claims. See "Risk Factors--
Dependence Upon Key Suppliers."

COMPETITION

The markets served by the Company are highly competitive. The Company
believes that the primary competitive factors affecting its business are the
reliability, cost-effectiveness, ease of use, safety and effectiveness of its
products, surgeon and purchaser familiarity with its instrumentation and
third-party reimbursement policies. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction of its or its competitors' products. Accordingly, the relative
speed with which the Company can develop products and complete approval or
clearance processes and supply commercial quantities of the products to the
market are also important competitive factors. The Company believes that its
ability to compete successfully in the ENT markets will depend on its ability
to maintain market share of its core product base and to facilitate the
conversion of traditional surgical procedures to microendoscopy surgical
techniques using innovative technology developed by the Company. See "Risk
Factors--Possible Adverse Effects of Competition."

The Company competes with Smith & Nephew ENT (a division of Smith & Nephew
plc formerly known as Richards Medical) in substantially all of the Company's
ENT product lines. Stryker Corporation, Smith & Nephew Endoscopy (a division
of Smith & Nephew plc) and Linvatec Corporation (a division of Bristol-Myers)
offer endoscopic equipment and sinus power systems that compete with those of
the Company. A number of other medical products companies offer products which
are directly competitive to certain products or product lines marketed by the
Company. Many of the Company's competitors and potential competitors have
substantially greater capital resources than the Company. Some of the
Company's competitors may have long term or preferential supply arrangements
with hospitals. Such arrangements may act as a barrier to market entry.

GOVERNMENT REGULATION

The Company's products, product development activities, promotional and
marketing activities and manufacturing processes are subject to extensive and
rigorous regulation by the FDA and comparable agencies in foreign countries.
In the U.S., the FDA regulates the interstate commerce of medical devices as
well as manufacturing, labeling, promotion and recordkeeping procedures for
such devices. For purposes of these regulations, the Company's products are
generally treated as medical "devices." In order for the Company to market its
products in the U.S., the Company must obtain from the FDA marketing clearance
through what is known as a 510(k) pre-market notification or obtain approval
through a more detailed application process resulting in what is known as PMA.
The process of obtaining marketing clearance for new medical devices from the
FDA can be costly and time-consuming, and there can be no assurance that such
clearance will be granted for the Company's products that are under
development or future products on a timely basis, if at all, or that FDA
review will not involve delays that will adversely affect the Company's
ability to commercialize additional products or expand permitted uses of
existing products.

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A manufacturer may seek FDA clearance to distribute a new medical device by
filing a 510(k) pre-market notification. A 510(k) pre-market notification
requires the manufacturer of a medical device to establish that the device is
"substantially equivalent" to medical devices legally marketed in the U.S. The
510(k) pre-market notification must be accompanied by appropriate information
or data establishing the claim of substantial equivalence, which, depending on
the type of product, may require animal or human clinical data. If this
substantial equivalence is established to the satisfaction of the FDA, the
manufacturer will receive FDA clearance for marketing of the medical device.
If the manufacturer cannot establish substantial equivalence or if the FDA
determines that a device requires a more rigorous review, the FDA will require
that the manufacturer submit a PMA application prior to obtaining approval to
market the device in the U.S. The PMA process requires laboratory and animal
studies, the submission to the FDA of a request for permission to clinically
evaluate the medical device in humans under an Investigational Device
Exemption ("IDE"), the conduct of human studies meeting the requirements of
the institutional review board of the study institution, the written informed
consent of all participating patients, the submission of a PMA application,
the review of the human studies by an FDA-selected scientific advisory panel
and final review (including manufacturing facilities review) and approval by
the FDA. This process is expensive and time-consuming, generally taking more
than a year and often substantially longer.

All of the Company's currently-marketed products either have received FDA
marketing clearance pursuant to 510(k) pre-market notifications filed by the
Company and cleared by the FDA, or are exempt from obtaining marketing
clearance by virtue of their status as pre-amendment devices (i.e. devices
introduced into interstate commerce prior to May 28, 1976). Although the
Company anticipates that, at least in the near term, its products will be
evaluated under the 510(k) pre-market notification process, there can be no
assurance that the Company's current or future products may not be subjected
to the PMA process or that the Company's current or future products in
development will receive FDA marketing clearance.

Even if regulatory clearance to market a device is obtained from the FDA,
this clearance may entail limitations on the indicated uses of the device.
Marketing clearance can also be withdrawn by the FDA due to the failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial clearance. The Company may be required to make further
filings with the FDA under certain circumstances such as the addition of new
product claims. The Company has made modifications to its cleared products
which the Company believes do not require submission of new 510(k) notices.
There can be no assurance, however, that the FDA would agree with any of the
Company's determinations and not require the Company to submit new 510(k)
notices for any of the changes made to its products and/or to stop marketing
until new 510(k)s are cleared by the FDA.

Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
refusal of the government to grant pre-market clearance or pre-market approval
for devices, withdrawal of approvals and criminal prosecution.

The Company is also required to register with the FDA as a medical device
manufacturer. As such, the Company's manufacturing facilities are subject to
inspection on a routine basis for compliance with GMP. These regulations
require that the Company manufacture its products and maintain its documents
in a prescribed manner with respect to manufacturing, testing and quality
control activities. As a medical device manufacturer, the Company is further
required to comply with FDA requirements regarding the reporting of
allegations of death or serious injury associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. Other FDA
requirements govern product labeling and prohibit a manufacturer from
marketing an approved device for unapproved applications. If the FDA believes
that a manufacturer is not in compliance with the law, it can institute
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess civil and criminal penalties against the manufacturer,
its officers and employees.

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The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.

The Company may become subject to future legislation and regulations
concerning the manufacture and marketing of medical devices. This could
increase the cost and time necessary to begin marketing new products and could
affect the Company in other respects not presently foreseeable. The Company
cannot predict the effect of possible future legislation and regulations.

Sales of medical devices outside the U.S. are subject to foreign regulatory
requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some
countries to complex clearance and production controls in others. As a result,
the processes and time periods required to obtain foreign marketing approval
may be longer or shorter than those necessary to obtain FDA approval. These
differences may affect the efficiency and timeliness of international market
introduction of the Company's products, and there can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in foreign countries.

For countries in the EU, in January 1995, CE mark certification procedures
became available for medical devices, the successful completion of which would
allow certified devices to be placed on the market in all EU countries. In
order to obtain the right to affix the CE mark to its products, medical device
companies must obtain certification that its processes meet European quality
standards, including certification that its design and manufacturing facility
complies with ISO 9001 standards. After June 1998, medical devices may not be
sold in EU countries unless they display the CE mark. The Company successfully
obtained certification under the ISO 9001 standards in November 1995. In
addition, international sales of medical devices manufactured in the U.S. but
not approved by the FDA for distribution in the U.S. are subject to FDA export
requirements. Under these requirements, the Company must assure that the
product is not in conflict with the laws of the country for which it is
intended for export, in addition to complying with the other requirements of
Sections 801(e) and/or 802 of the United States Food, Drug and Cosmetic Act.

THIRD-PARTY REIMBURSEMENT

In the U.S., health care providers that purchase medical devices generally
rely on third-party payors, such as Medicare, Medicaid, private health
insurance plans and health maintenance organizations, to reimburse all or a
portion of the cost of the devices. The Medicare program is funded and
administered by the Health Care Financing Administration ("HCFA"), while the
Medicaid program is jointly funded by HCFA and the states, which administer
the program under general federal oversight. The Company believes its current
products and the procedures in which such products are used are generally
eligible for coverage under these third-party reimbursement programs. The
Company also believes that the products it is developing and the procedures in
which such products will be used will be eligible for third-party
reimbursement. The competitive position of certain of the Company's products
will be partially dependent upon the extent of coverage and adequate
reimbursement for such products and for the procedures in which such products
are used.

The federal government and certain state governments are currently
considering a number of proposals to reform the Medicare and Medicaid health
care reimbursement system. The Company is unable to evaluate what legislation
may be drafted and whether or when any such legislation will be enacted and
implemented. Certain of the proposals, if adopted, could have an adverse
effect on the Company's business, financial condition and results of
operations.

During the past several years, the major third-party payors have
substantially revised their reimbursement methodologies in an attempt to
contain their health care reimbursement costs. Medicare

43
<PAGE>

reimbursement for inpatient hospital services is based on a fixed amount per
admission based on the patient's specific diagnosis. As a result, any illness
to be treated or procedure to be performed will be reimbursed only at a
prescribed rate set by the government that is known in advance to the health
care provider. If the treatment costs less, the provider is still reimbursed
for the entire fixed amount; if it costs more, the provider cannot bill the
patient for the difference. No separate payment is made in most cases for
products such as the Company's instrumentation when they are furnished or used
in connection with inpatient care. Many private third-party payors and some
state Medicaid programs have also adopted similar prospective payment systems.

Third-party payors have recently increased their emphasis on managed care,
which has led to an increased emphasis on cost-effective medical devices by
health care providers. In addition, through their purchasing power, these
payors often seek discounts, price reductions or other incentives from medical
products suppliers.

The Company intends to seek international reimbursement approvals for its
products, although there can be no assurance that such approvals will be
obtained in a timely manner or at all. Reimbursement and health care payment
systems in international markets vary significantly by country and include
both government sponsored health care and private insurance. To the extent
that any of the Company's products are not entitled to reimbursement in any
international market, market acceptance of such products in such international
market would be adversely affected.

PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS

Proprietary protection for the Company's products and know-how is important
to the Company's business. Thus, the Company's policy is to prosecute and
enforce its patents and proprietary technology. The Company intends to
continue to file patent applications to protect technology, inventions and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know-how, continuing technological
innovation and licensing opportunities to develop and maintain its competitive
position.

As of September 13, 1996, the Company held 56 U.S. patents and 21 foreign
patents, and had filed 20 additional U.S. patent applications and 13 patent
applications in certain major industrial countries. The Company is also
licensed under 9 patents owned by third parties.

The patent positions of medical device companies, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, even though the Company currently is prosecuting its patent
applications with the U.S. Patent and Trademark Office and certain foreign
patent authorities, the Company does not know whether any of its remaining
applications will result in the issuance of any patents or, if any patents are
issued, whether they will provide significant proprietary protection or will
be circumvented or invalidated. Because patent applications in the U.S. are
maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months and there may be material patents or
publications of which the Company is not aware, the Company cannot be certain
that it was the first creator of inventions claimed by pending patent
applications or that it was the first to file patent applications for such
inventions.

The medical device industry is characterized by frequent and substantial
intellectual property litigation, particularly with respect to newly developed
technology. Intellectual property litigation is complex and expensive, and the
outcome of such litigation is difficult to predict. Any future litigation,
regardless of the outcome, is likely to result in substantial expense to the
Company and significant diversion of the efforts of the Company's technical
and management personnel. An adverse determination in any such proceeding
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from such parties if licenses to such rights
could be obtained, and/or require

44
<PAGE>

the Company to cease using such technology. There can be no assurance that if
such licenses were obtainable, they would be obtainable at costs reasonable to
the Company. If forced to cease using such technology, there can be no
assurance that the Company would be able to develop or obtain alternate
technology. Additionally, if third-party patents containing claims affecting
the Company's technology are issued and such claims are determined to be
valid, there can be no assurance that the Company would be able to obtain
licenses to such patents at costs reasonable to the Company, if at all, or be
able to develop or obtain alternative technology. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing, using or
selling certain of its products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company's practice is to require its employees, consultants, outside
collaborators and researchers and other advisors to execute confidentiality
agreements upon the commencement of employment or consulting relationships
with the Company. These agreements provide that all confidential information
developed or made known to the individual during the course of the
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties, subject to a right to publish certain information
in the scientific literature in certain circumstances and subject to other
specific exceptions. In the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or adequate
remedies in the event of unauthorized use or disclosure of such information.

PRODUCT LIABILITY AND INSURANCE

The business of the Company entails the risk of product liability claims and
any such claims could have an adverse impact on the Company. The Company has
taken and will continue to take what it believes are appropriate precautions,
including maintaining general liability and commercial liability insurance
policies which include coverage for product liability claims. The Company
evaluates its insurance requirements on an ongoing basis. There can be no
assurance that product liability claims will not exceed such insurance
coverage limits or that such insurance will be available on commercially
reasonable terms or at all. The Company currently is involved in certain legal
proceedings involving product liability claims. Based on information presently
available to the Company, the Company believes that it has adequate legal
defenses or insurance coverage for these actions, and that the ultimate
outcome of these actions will not have a material adverse effect on the
Company.

MANUFACTURING AND PROPERTIES

The Company owns its 52,000 square-foot corporate headquarters and
manufacturing facility and leases a 36,863 square-foot warehouse and
distribution facility in Jacksonville, Florida. At its Jacksonville
manufacturing facility, the Company produces all of the products that it
manufactures other than fluid-control products and ophthalmology products. The
Company has numerous manufacturing capabilities at the Jacksonville facility,
including: injection molding; insert molding; CNC machining; CAD/CAM; form,
fill and seal; ETO sterilization utilizing a Joslyn reclamation system;
specialty surgical instrument manufacturing; tool design and manufacturing;
design and production of manufacturing equipment; electronics assembly; bar
code technology; and automated storage systems.

The Company also owns a 34,000 square-foot manufacturing facility and a
6,300 square-foot distribution facility in Mystic, Connecticut and leases a
6,400 square-foot manufacturing facility in St. Louis, Missouri. The Company's
Merocel product line of fluid-control products is manufactured at the Mystic
facility and its ophthalmic product line is manufactured in part at the St.
Louis facility.

45
<PAGE>

The Company believes that the properties are adequate to serve the Company's
business operations for the foreseeable future. The Company believes that if
it were unable to renew the leases on any of its leased facilities, other
suitable facilities would be available to meet the Company's needs.

ENVIRONMENTAL MATTERS

The Company believes that it is in substantial compliance with all
applicable laws and regulations for the protection of the environment and the
health and safety of its employees. Compliance with federal, state and local
environmental regulations relating to the discharge of substances into the
environment, the disposal of hazardous waste and other related activities has
had and will continue to have an impact on the operations of the Company, but
has, since the formation of the Company, been accomplished without having a
material adverse effect on the operations of the Company. While it is
difficult to estimate the timing and ultimate costs to be incurred due to
uncertainties about the status of laws, regulations and technology, management
presently has no planned expenditures of a significant amount for future
environmental compliance.

EMPLOYEES

As of July 31, 1996, the Company had 455 full-time employees and 16
temporary employees, including 245 in production, 55 in professional and
technical positions, 51 in administration and 120 in sales and marketing. The
Company believes that its future success will depend in large part upon the
continued service of its senior management personnel, most of whom joined the
Company in April 1996, and upon the Company's continuing ability to attract
and retain highly qualified managerial, operational, technical and sales and
marketing personnel. Competition for highly qualified personnel is intense and
there can be no assurance that the Company will be able to retain its key
personnel or that it will be able to attract and retain additional qualified
personnel in the future. The Company has not experienced any work stoppage and
considers its relations with its employees to be satisfactory.

LITIGATION

The Company is currently involved in certain legal proceedings incidental to
the normal conduct of its business. The Company does not believe that any
liabilities relating to the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.

46
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of September 13, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
James T. Treace.................. 50 President, Chief Executive Officer and
Chairman of the Board of Directors
F. Barry Bays.................... 49 Senior Vice President, Operations and
Chief Operating Officer
Thomas E. Timbie................. 39 Vice President, Finance, Chief
Financial Officer and Secretary
John R. Treace................... 51 Vice President, U.S. Sales
R. Glen Coleman.................. 41 Vice President, Marketing
Guy K. Williamson................ 42 Vice President, International;
President, Xomed International, Inc.
Vice President, Research and
Fred B. Dinger, III.............. 35 Development
Vice President, Regulatory Affairs and
Dan H. Treace.................... 48 Quality Assurance
Vice President; President of Ophthalmic
Mark J. Fletcher................. 40 Products
Gerard Bussell................... 47 Vice President, Operations
Richard B. Emmitt (1)(2)......... 51 Director
Paul H. Klingenstein............. 40 Director
William R. Miller (1)............ 68 Director
Rodman W. Moorhead, III.......... 52 Director
James E. Thomas (2).............. 36 Director
Elizabeth H. Weatherman (1)(2)... 36 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

James T. Treace has been President, Chief Executive Officer and Chairman of
the Board of Directors of the Company since April 1996. From 1993 until its
acquisition by the Company in April 1996, Mr. Treace served as President,
Chairman of the Board of Directors and Chief Executive Officer of TreBay. From
1990 to 1993, Mr. Treace served as President of Linvatec Corporation
("Linvatec"), a medical device company formerly known as Concept, Inc.
("Concept"), which became a wholly owned subsidiary of Bristol-Myers in 1990.
Mr. Treace served as President and Chief Executive Officer of Concept from
1981 until its acquisition by Bristol-Myers in 1990. Mr. Treace is the brother
of John R. Treace and Dan H. Treace.

F. Barry Bays has been Senior Vice President, Operations and Chief Operating
Officer of the Company since April 1996. From 1993 to April 1996, Mr. Bays
served as Vice President and Chief Operating Officer and a Director of TreBay.
From 1990 to 1993, Mr. Bays served as Executive Vice President and Chief
Operating Officer of Linvatec. From 1981 to 1990, Mr. Bays served as Executive
Vice President and Chief Operating Officer of Concept.

Thomas E. Timbie has been Vice President, Finance and Chief Financial
Officer of the Company since April 1996. From 1994 to April 1996, Mr. Timbie
served as Vice President and Chief Financial Officer of TreBay. From 1990 to
1994, Mr. Timbie held financial management positions at Linvatec, including
Senior Director, Working Capital from 1992 to 1994 and Assistant Controller
from 1990 to 1992. From 1987 to 1990, Mr. Timbie served as Director, Financial
Accounting and Reporting of Concept.

47
<PAGE>

John R. Treace has been Vice President, U.S. Sales of the Company since
April 1996. From 1995 to April 1996, Mr. Treace served as Vice President,
Sales and Marketing of TreBay. From 1981 to 1994, Mr. Treace was a distributor
for orthopaedic and microsurgery product divisions of Smith & Nephew plc. Mr.
Treace is the brother of James T. Treace and Dan H. Treace.

R. Glen Coleman has been Vice President, Marketing of the Company since
August 1996. From January 1983 to August 1996, Mr. Coleman held several
management positions at Linvatec, including Vice President, Global Marketing
from June 1996 to July 1996, Vice President, Sales from October 1993 to June
1996, Vice President and General Manager of the Concept Division from May 1991
to October 1993 and Vice President, Research and Development. From 1976 to
1983, Mr. Coleman held engineering and marketing positions within divisions of
Smith & Nephew plc.

Guy K. Williamson has been Vice President, International of the Company and
President, Xomed International, Inc. since July 1996. From January 1988 to
June 1996, Mr. Williamson held various positions within the Bristol-Myers
Medical Device Group, including Vice President, Zimmer International from
January 1994 to June 1996, General Manager, China and Hong Kong from February
1992 to December 1993, Vice President, Marketing and International
Administration, Linvatec from January 1988 to January 1992, and General
Manager Canada, Edward Weck Inc. from 1980 to 1988.

Fred B. Dinger, III has been Vice President, Research and Development of the
Company since May 1996. From 1992 to 1996, Mr. Dinger held several positions
with Linvatec, including Vice President, Research and Development from 1994 to
1996, Director, New Product Development from 1993 to 1994 and Manager, Power
Systems Development from 1992 to 1993. From 1984 to 1992, Mr. Dinger was
Engineering Section Supervisor of Honeywell Incorporated.

Dan H. Treace has been Vice President, Regulatory Affairs and Quality
Assurance of the Company since May 1996. From 1994 to April 1996, Mr. Treace
served as Vice President and Quality Manager of TreBay. From 1989 to 1994, Mr.
Treace served as Vice President, Technical Affairs of Xomed-Treace, which was
acquired by the Company in 1994. Mr. Treace is the brother of John R. Treace
and James T. Treace.

Mark J. Fletcher has been Vice President of the Company and President of
Ophthalmic Products since July 1996. From April 1996 to July 1996, Mr.
Fletcher served as Vice President, U.S. Marketing of the Company and from 1994
to April 1996, he served as Vice President, Sales and Marketing of the
Company. From 1988 to 1994, Mr. Fletcher held several senior management
positions with Stryker Corporation, including Executive Vice President, Sales
and Marketing from 1993 to 1994, Vice President and General Manager, Stryker
Medical, the Netherlands from 1992 to 1993, and Vice President, Sales, Medical
Division from 1990 to 1992.

Gerard Bussell has been Vice President of Operations of the Company since
March 1996 and from 1993 to March 1996 was Director of Manufacturing
Operations and Director of Manufacturing of the Company. Prior to joining the
Company, Mr. Bussell served in senior management positions from 1979 to 1993
with Allergan, Inc., including Senior Director, Worldwide Materials, and
Managing Director.

Richard B. Emmitt has served as a Director of the Company since April 1994
and from December 1990 to 1994 was a Director of Merocel, which became a
subsidiary of the Company in 1994. Mr. Emmitt has been a Managing Director of
The Vertical Group, Inc., an investment firm, since February 1989. He is also
a Director of SurvivaLink Corporation and Cardiotronics Systems, Inc.

Paul H. Klingenstein has served as a Director of the Company since April
1994. Mr. Klingenstein has been with Accel Partners, a venture capital firm,
since 1986, where he has been a General Partner since 1988. He is also a
Director of several privately held health care and biopharmaceutical
companies.

William R. Miller has served as a Director of the Company since April 1994
and from 1991 to 1994 was a Director of Merocel. In January 1991, Mr. Miller
retired as Vice Chairman of the Board of Directors of Bristol-Myers. From 1985
to January 1991 Mr. Miller was a Director of Bristol-Myers. Mr. Miller served

48
<PAGE>

as Chairman of the Board of the Pharmaceutical Manufacturers Association from
1986 until 1987 and was Vice President and a member of the council of the
International Federation of Pharmaceutical Manufacturers Associations from
1988 until 1990. Mr. Miller is a member of the Board of Trustees of the Cold
Spring Harbor Laboratory and is a Director of ImClone Systems, Inc., Isis
Pharmaceuticals, Inc., St. Jude Medical, Inc. and Westvaco Corporation, as
well as several private companies. In addition, Mr. Miller serves as Chairman
of the Board of Directors of SIBIA Neurosciences, Inc. and Vion
Pharmaceuticals, Inc. (formerly OncoRx).

Rodman W. Moorhead, III has served as a Director of the Company since 1994
and was a Director of Merocel from 1990 to 1994. Since 1973, he has been with
E.M. Warburg, Pincus & Co., Inc. ("Warburg, Pincus"), a private investment
firm, where he currently serves as a Senior Managing Director. Mr. Moorhead is
also a Director of NeXstar Pharmaceuticals, Inc., Value Health, Inc. and a
number of privately held companies.

James E. Thomas has served as a Director of the Company since April 1994.
Since 1989, he has been with Warburg, Pincus, where he currently serves as a
Managing Director. Mr. Thomas is also a Director of Anergen, Inc., Celtrix
Pharmaceuticals, Inc., Menley & James Laboratories, Inc., and several
privately held companies.

Elizabeth H. Weatherman has served as a Director of the Company since April
1994 and was a Director of Merocel from December 1990 until 1994. Since 1988,
she has been with Warburg, Pincus, where she currently serves as a Managing
Director. Ms. Weatherman is also a Director of Cardiotronics Systems, Inc.,
VitalCom Inc. and several privately held health care companies.

Each director serves until the expiration of his term and thereafter until
his successor is duly elected and qualified. A stockholders agreement among
the Company and substantially all of its current stockholders provides that WP
Investors has the right to designate specified numbers of persons to the
Company's Board of Directors so long as WP Investors maintains specified
levels of ownership of the outstanding Class A Common Stock. See "--
Stockholders Agreement." Executive officers of the Company are elected
annually by the Board of Directors and serve at its discretion or until their
successors are duly elected and qualified.

The Board of Directors has established a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
employees of, and consultants to, the Company and administers the Stock Option
Plan and the Company's 401(k) and Profit Sharing Plan (the "401(k) Plan").
During 1995, the Compensation Committee was composed of Richard B. Emmitt,
James E. Thomas and Elizabeth H. Weatherman. The current members of the
Compensation Committee are Richard B. Emmitt, William R. Miller and Elizabeth
H. Weatherman. The Board of Directors has also established an Audit Committee,
which reviews the results and scope of the annual audit of the Company's
financial statements conducted by the Company's independent accountants, the
scope of other services provided by the Company's independent accountants,
proposed changes in the Company's financial and accounting standards and
principles, and the Company's policies and procedures with respect to its
internal accounting, auditing and financial controls and makes recommendations
to the Board of Directors on the engagement of the independent accountants, as
well as other matters which may come before the Audit Committee or at the
direction of the Board of Directors. The current members of the Audit
Committee are Richard B. Emmitt, James E. Thomas and Elizabeth H. Weatherman.

DIRECTORS' ANNUAL COMPENSATION

William R. Miller receives $1,000 in directors' fees per meeting from the
Company. No other member of the Board of Directors currently receives
directors' fees from the Company. The Company is obligated to reimburse its
Board members for all reasonable expenses incurred in connection with their
attendance at directors' meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is currently composed of Richard B. Emmitt,
William R. Miller and Elizabeth H. Weatherman.

49
<PAGE>

EXECUTIVE COMPENSATION

Summary Compensation Table. As required by the rules and regulations of the
Securities and Exchange Commission, the following table sets forth information
regarding the compensation of the Company's Chief Executive Officer during
fiscal 1995 and the four other most highly compensated executive officers (the
"Executive Officer Group") for fiscal 1995. In April and May 1996, four
members of the Executive Officer Group were replaced. Information with respect
to the Company's new executive officers is included elsewhere in this section.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION

<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Mark K. Adams (1)................. $200,525 $58,890 $37,104(5) $2,345(8)
President and Chief Executive
Officer
Arthur Gertzman (2)............... 134,289 23,799 (6) 3,626(8)
Vice President, Research and
Development
Mark J. Fletcher.................. 140,000 4,200 17,224(7) --
Vice President, Sales and
Marketing
Marley Price (3).................. 116,029 2,644 -- 2,603(8)
Vice President, Operations
David R. Grant (4)................ 115,923 2,673 -- 2,594(8)
Vice President, Finance
</TABLE>
- --------
(1) Mr. Adams' last day of employment with the Company was May 20, 1996.
(2) Mr. Gertzman's last day of employment with the Company was April 30, 1996.
(3) Mr. Price's last day of employment with the Company was April 22, 1996.
(4) Mr. Grant's last day of employment with the Company was June 28, 1996.
(5) Represents $30,000 paid to Mr. Adams as a housing allowance and $7,104
paid to Mr. Adams as an automobile allowance.
(6) Other annual compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such perquisites
and other personal benefits was less than $50,000 and constituted less
than 10% of the executive's total annual salary and bonus.
(7) Represents a reimbursement of Mr. Fletcher's moving expenses.
(8) Represents a matching contribution by the Company to the 401(k) Plan for
the benefit of the executive.

James T. Treace joined the Company as its President, Chief Executive Officer
and Chairman of the Board of Directors in April 1996. Mr. Treace receives an
annual salary of $230,000 and will be eligible to receive an annual cash bonus
under the Company's Key Executive Bonus Program. On April 16, 1996, the
Company granted to Mr. Treace an option under the Stock Option Plan to
purchase 73,000 shares of Common Stock at an exercise price of $10.65 per
share.

F. Barry Bays joined the Company as its Senior Vice President, Operations
and Chief Operating Officer in April 1996. Mr. Bays receives an annual salary
of $175,000 and will be eligible to receive an annual cash bonus under the
Company's Key Executive Bonus Program. On April 16, 1996, the Company granted
to Mr. Bays an option under the Stock Option Plan to purchase 42,000 shares of
Common Stock at an exercise price of $10.65 per share.

John R. Treace joined the Company as its Vice President, U.S. Sales in April
1996. Mr. Treace receives an annual salary of $150,000 and will be eligible to
receive an annual cash bonus under the Company's Key Executive Bonus Program.
The Company granted to Mr. Treace on April 16, 1996 an option under the Stock
Option Plan to purchase 8,000 shares of Common Stock at an exercise price of
$10.65 per share and on June 14, 1996 an option under such plan to purchase
15,500 shares of Common Stock at an exercise price of $10.65 per share.

50
<PAGE>

R. Glen Coleman joined the Company as its Vice President, Marketing in
August 1996. Mr. Coleman receives an annual salary of $150,000 and will be
eligible to receive an annual cash bonus under the Company's Key Executive
Bonus Program. On August 12, 1996, the Company granted to Mr. Coleman an
option under the Stock Option Plan to purchase 30,000 shares of Common Stock
at an exercise price of $10.65 per share.

Guy K. Williamson joined the Company as its Vice President, International
and President, Xomed International, Inc. in July 1996. Mr. Williamson receives
an annual salary of $150,000 and will be eligible to receive an annual cash
bonus under the Company's Key Executive Bonus Program. On July 1, 1996, the
Company granted to Mr. Williamson an option under the Stock Option Plan to
purchase 30,000 shares of Common Stock at an exercise price of $10.65 per
share.

OPTION GRANTS DURING 1995

During fiscal 1995, the Company granted options under the Stock Option Plan
to purchase an aggregate of 8,000 shares of Common Stock at an exercise price
of $9.58 per share. No stock options were granted to any member of the
Executive Officer Group during fiscal 1995.

In January 1996, the Company granted certain key employees options under the
Stock Option Plan to purchase an aggregate of 96,000 shares of Common Stock at
an exercise price of $9.58 per share. Included among these grants was a grant
to Mark J. Fletcher of an option to purchase 10,000 shares of Common Stock at
an exercise price of $9.58 per share. These options provide that the right to
purchase 25% of the shares of Common Stock subject to the options vests on
each of the first four anniversaries of the date of grant. The options expire
five years after the date of grant.

In April 1996, the Company granted certain employees options under the Stock
Option Plan to purchase an aggregate of 131,000 shares of Common Stock at an
exercise price of $10.65 per share. Included among these grants were grants to
James T. Treace, F. Barry Bays and John R. Treace of options to purchase
73,000, 42,000 and 8,000 shares of Common Stock, respectively. In June 1996,
the Company granted certain employees options under the Stock Option Plan to
purchase an aggregate of 79,500 shares of Common Stock at an exercise price of
$10.65 per share. Included among these grants were grants to John R. Treace
and Thomas E. Timbie of options to purchase 15,500 and 23,500 shares of Common
Stock, respectively. In July 1996, the Company granted to Guy K. Williamson
options under the Stock Option Plan to purchase 30,000 shares of Common Stock,
at an exercise price of $10.65 per share. On August 12, 1996, the Company
granted to R. Glen Coleman options under the Stock Option Plan to purchase
30,000 shares of Common Stock, at an exercise price of $10.65 per share. These
options provide that the right to purchase 25% of the shares of Common Stock
subject to the options vests on each of the first four anniversaries of the
date of grant. The options expire five years after the date of grant.

FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning the number and value
of unexercised stock options held at the end of 1995 by each member of the
Executive Officer Group. No stock options were exercised by members of the
Executive Officer Group during fiscal 1995.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- ------------------------------
<S> <C> <C>
Mark K. Adams........... 47,125/42,375 $801,325/$539,475
Arthur Gertzman......... 7,000/11,000 110,840/152,520
Mark J. Fletcher........ 5,000/15,000 52,100/156,300
Marley Price............ 2,000/6,000 20,840/62,520
David R. Grant.......... 2,000/6,000 20,840/62,520
</TABLE>
- --------

(1) There was no public trading market for the Common Stock on December 31,
1995. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of an assumed initial public
offering price of $20.00 per share, less the aggregate exercise price of
the options.

51
<PAGE>

1996 STOCK OPTION PLAN

On April 15, 1996, the Board of Directors adopted and the stockholders
approved the Stock Option Plan. The Stock Option Plan was subsequently amended
and restated on June 14, 1996 and July 24, 1996 and approved by stockholders
on July 24, 1996. The Stock Option Plan is open to participation by directors,
officers, consultants, other key employees of the Company or of its
subsidiaries and certain other key persons who the Stock Option Committee (as
defined below) determines shall receive options under the Stock Option Plan.

The Stock Option Plan authorizes: (i) the grant of options to purchase
Common Stock intended to qualify as incentive stock options ("Incentive
Options"), as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"); and (ii) the grant of options that do not so qualify
("Non-Statutory Options"). The number of shares of Common Stock reserved for
issuance under the Stock Option Plan is 778,000 shares. As of August 20, 1996,
options to purchase an aggregate of 501,191 shares having a weighted average
exercise price of $9.76 per share were outstanding under the Stock Option
Plan, options for 108,900 shares had been exercised under the Stock Option
Plan and options to purchase 167,909 shares are available for grant under the
Stock Option Plan. The Stock Option Plan expires on April 16, 2004.

The Stock Option Plan is administered by a committee (the "Stock Option
Committee") appointed by the Board of Directors of the Company. The
Compensation Committee serves as the Stock Option Committee. The Stock Option
Committee has the sole authority, in its absolute discretion: (i) to determine
which of the eligible employees of the Company and its subsidiaries shall be
granted options; (ii) to authorize the granting of both Incentive Options and
Non-Statutory Options; (iii) to determine the times when options shall be
granted and the number of shares to be optioned; (iv) to determine the option
price of the shares subject to each option, which price shall be not less than
the fair market value of the Common Stock at the time the option was granted;
(v) to determine the time or times when each option becomes exercisable, the
duration of the exercise period and any other restrictions on the exercise of
options issued under the Stock Option Plan; (vi) to prescribe the form or
forms of the option agreements under the Stock Option Plan; (vii) to adopt,
amend and rescind such rules and regulations as, in its opinion, may be
advisable in the administration of the Stock Option Plan; and (viii) to
construe and interpret the Stock Option Plan, the rules and regulations and
the option agreements under the Stock Option Plan and to make all other
determinations deemed necessary or advisable for the administration of the
Stock Option Plan. All decisions, determinations and interpretations of the
Stock Option Committee are final and binding on all optionees.

Incentive Options may be granted only to officers and other key employees of
the Company or its subsidiaries. Non-Statutory Options may be granted to
directors, consultants, or other key persons who the Stock Option Committee
determines shall receive options under the Stock Option Plan.

No option may be exercised after the date ten years from the date of grant
of such option (five years in the case of Incentive Options of individuals
holding more than ten percent of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary thereof
("greater-than-ten-percent-stockholders")) (the "Termination Date"). The
exercise price for Non-Statutory Options may not be less than 50% of the fair
market value of the Common Stock on the date of grant. The exercise price for
Incentive Options may not be less than 100% of fair market value of the Common
Stock on the date of grant (110% in the case of a greater-than-ten-percent-
stockholder). The aggregate fair market value (determined as of the time the
option is granted) of the Common Stock with respect to which any Incentive
Options may be exercisable for the first time by the optionee in any calendar
year (under the Stock Option Plan or any other stock option plan of the
Company or any parent or subsidiary thereof) shall not exceed $100,000.

Options are non-transferable except by will or the laws of descent and
distribution. Generally, unless otherwise provided by the Stock Option
Committee, options granted under the Stock Option Plan terminate upon the
earliest of: (i) the expiration date of the option; (ii) the date of voluntary
termination of the optionee's employment by the optionee; (iii) the date of
termination of the optionee's employment

52
<PAGE>

by the Company for cause; (iv) three months after the date of termination of
the optionee's employment by the Company without cause; (v) one year after the
cessation of the optionee's employment by reason of a disability within the
meaning of Section 105(d)(4) of the Code; and (vi) one year after the death of
an optionee prior to the Termination Date and while employed by the Company or
a subsidiary thereof or while entitled to exercise an option pursuant to (v)
above (such option shall be exercisable by the person to whom the optionee's
rights under the option pass by will or the applicable laws of descent and
distribution). For purposes of the Stock Option Plan, the Company shall have
"cause" to terminate an optionee's employment if the Company has cause to
terminate the optionee's employment under any existing employment agreement
between the optionee and the Company or, in the absence of such an employment
agreement, upon (a) determination by the Board of Directors that the optionee
has ceased to perform his duties to the Company (other than as a result of his
incapacity due to physical or mental illness or injury), which failure amounts
to an intentional and extended neglect of his duties to the Company, (b) the
Board of Directors' determination that the optionee has engaged or is about to
engage in conduct materially injurious to the Company, or (c) the optionee
having been convicted of a felony. If an option may be exercised during any
period after the termination of an optionee's employment with the Company,
such option may be exercised only to the extent that the optionee was entitled
to exercise such option at the time of such termination.

KEY EXECUTIVE BONUS PROGRAM

The Company maintains a Key Executive Bonus Program in which key management
personnel are eligible to participate. The plan allows participants to earn
bonuses up to stated percentages of their base salary. For 1995, the
percentages were as follows: 50% for the President, 30% for Vice Presidents,
25% for sales directors, 25% for regional sales managers, 25% for
international managers, 20% for first level managers and 10% for second level
managers. The bonuses are paid in part based on the Company's achievement of
operating results, and in part based on achievement of individual goals
established for the participant. During 1995, a total of 37 key managers
participated in the bonus plan. The Company presently intends to continue the
bonus plan for 1996 and future years.

401(K) PLAN

The Company presently maintains the 401(k) Plan for the benefit of
substantially all full-time employees. The 401(k) Plan is qualified under
Sections 401(a) and 401(k) of the Code. Participants in the plan may elect to
defer up to 16% of their eligible compensation and have such amount invested
in accordance with the investment alternatives available under the plan. The
Company may make matching contributions each year equal to 50% of participant
deferrals up to 4% of eligible compensation. The Company may also make
discretionary contributions.

EMPLOYMENT AGREEMENTS AND SEVERANCE AGREEMENT

In connection with its acquisition of TreBay, the Company executed
employment agreements with James T. Treace and F. Barry Bays. The Company
agreed to employ Mr. Treace as President, Chairman of the Board of Directors
and Chief Executive Officer at an annual salary of $230,000 and Mr. Bays as
Senior Vice President of Operations and Chief Operating Officer at an annual
salary of $175,000. In addition, Messrs. Treace and Bays are eligible for the
Key Executive Bonus Program adopted by the Company, which program provides for
a bonus in an amount up to and at the 50% level of an employee's salary upon
attainment of the bonus criteria. The employment agreements have an initial
term of three years, and may be extended upon good faith negotiations between
the parties, which negotiations shall begin not later than 90 days prior to
the expiration of the stated term of the agreement.

The agreements entitle these executive officers to participate in such
fringe benefits as shall be generally provided to the executives of the
Company, including medical insurance and retirement programs which may be
adopted from time to time by the Company. In addition, the Company has granted
to Messrs. Treace and Bays 73,000 and 42,000 stock options, respectively,
under the Stock Option

53
<PAGE>

Plan, and each of Messrs. Treace and Bays are eligible for additional grants
of stock options as target bonuses pursuant to corporate performance
objectives established by the Company's Compensation Committee. The
Compensation Committee will review each executive officer's compensation and
award such bonuses or make such increases to the annual salary as the
Compensation Committee, in its sole discretion, determines are merited.

The employment agreements contain covenants prohibiting the improper
disclosure and use of any of the Company's and its predecessors' trade
secrets, know-how and proprietary processes, as well as provisions assigning
to the Company all inventions made or conceived by the executive officer
during his employment with the Company. Each executive officer agreed with the
Company that until twelve months after the termination of his employment with
the Company he would not (whether as an officer, director, owner, employee,
partner or other direct or indirect participant) engage in any Competitive
Business (defined as the manufacturing, supplying, producing, selling,
distributing or providing for sale of (i) any product, device or instrument
manufactured from or using polyvinal acetal (PVAc) material or technology or
(ii) any eye, ear, nose or throat product, device or instrument (x) of a type
manufactured or sold by the Company or its subsidiaries or (y) in clinical
development sponsored by the Company or its subsidiaries, in each case, as of
the date of termination of employment).

The Company may terminate the employment of the executive officers under the
employment agreements (i) upon 30 days' notice if the employee becomes
physically or mentally incapacitated or is injured so that he is unable to
perform the services required of him and such inability to perform continues
for a period in excess of six months and is continuing at the time of such
notice, (ii) for cause upon notice of such termination to the employee or
(iii) without cause upon 30 days' notice of such termination to the employee.
If an employment agreement is terminated pursuant to (i) above, the executive
officer shall receive salary continuation pay from the date of such
termination until April 16, 1999, reduced by applicable payroll taxes and
amounts received by the executive officer under any Company-maintained
disability insurance policy or plan under Social Security or similar laws. If
an employment agreement is terminated pursuant to (ii) above, the executive
officer shall receive no salary continuation pay or severance pay. If an
employment agreement is terminated pursuant to (iii) above, the executive
officer shall receive salary continuation pay for a period of twelve months
from and after the date of such termination.

On May 10, 1996, the Company entered into a Separation Agreement with Mark
K. Adams (the "Separation Agreement"). Pursuant to the terms of the Separation
Agreement, (i) all options received by Mr. Adams under the Stock Option Plan
became fully vested, (ii) the Company agreed to provide to Mr. Adams an
allowance for outplacement services, (iii) the Company paid Mr. Adams a lump
sum of $249,532, (iv) the Company agreed to forgive a loan to Mr. Adams in the
amount of $300,007 in exchange for his surrender of 9,563 shares of Series A
Convertible Preferred Stock and 2,074 shares of Series C Redeemable Preferred
Stock held by him and (v) the Company agreed to make monthly severance
payments to Mr. Adams at a rate of $175,000 per year for two years, with the
first year's payment guaranteed and payments in the second year payable only
until such time as he obtains full time employment elsewhere. Mr. Adams has
also agreed to provide consulting services to the Company for a period of two
years for no additional consideration. In addition, Mr. Adams has agreed to
certain customary provisions regarding non-competition, non-solicitation and
confidentiality.

STOCKHOLDERS AGREEMENT

Under a stockholders agreement among the Company and substantially all of
its existing stockholders, the parties agree to take all action within their
respective power, including but not limited to, the voting of capital stock of
the Company, required to cause the Board of Directors of the Company to
consist of seven members. The stockholders agreement provides that, so long as
WP Investors owns 40% or more of the total number of outstanding shares of
Common Stock, WP Investors will have the right to designate three persons to
be appointed or nominated for election to the Company's Board of Directors. If
at any

54
<PAGE>

time WP Investors owns less than 40%, but 20% or more, of the total number of
outstanding shares of Common Stock, WP Investors will have the right to
designate two persons to be appointed or nominated for election to the
Company's Board of Directors. If at any time WP Investors owns less than 20%,
but 10% or more, of the total number of outstanding shares of Common Stock, WP
Investors will have the right to designate one person to be appointed or
nominated for election to the Company's Board of Directors. WP Investors has
informed the Company that it intends, upon the closing of this offering, to
convert all of its Non-Voting Common Stock into Common Stock, provided that,
in no event will such conversion result in its holding more than 49% of the
outstanding shares of Common Stock following such conversion. Upon completion
of this offering and the Share Exchange, WP Investors will have under the
stockholders agreement the right to designate three persons to be appointed or
nominated to the Company's Board of Directors. In addition, the stockholders
agreement provides each current stockholder with certain rights to inspect the
Company's properties and its books and records and to discuss its affairs with
management so long as the stockholder holds at least 2% of the combined
outstanding Common Stock and Non-Voting Common Stock.

CERTAIN TRANSACTIONS

As part of the financing of the Xomed Acquisition, the Company issued to
certain institutional investors, including WP Investors, an aggregate of: (i)
340,454 shares of Series A Convertible Preferred Stock for approximately
$3,261,549 in aggregate consideration; (ii) 2,127,838 shares of Series B
Convertible Preferred Stock for approximately $20,384,688 in aggregate
consideration; and (iii) 198,561 shares of Series C Redeemable Preferred Stock
for approximately $19,856,100 in aggregate consideration. Of the shares issued
by the Company, WP Investors purchased all of the shares of Series B
Convertible Preferred Stock for approximately $20,384,688 in aggregate
consideration and 171,173 of the shares of Series C Redeemable Preferred Stock
for approximately $17,173,000 in aggregate consideration.

The Company is a party to a stockholders agreement with substantially all of
its existing stockholders relating to, among other things, the composition of
the Company's Board of Directors. See "Management--Stockholders Agreement."

On November 7, 1995, TreBay loaned $883,000 to James T. Treace, its
President and Chief Executive Officer. Following the Company's acquisition of
TreBay in April 1996, Mr. Treace became the Company's President and Chief
Executive Officer. The loan is payable on demand at any time following
November 7, 2000 and matures on November 7, 2002. Interest accrues on the loan
at an annual rate of 10% and is payable, at Mr. Treace's election, upon each
anniversary of the loan or its maturity. The loan is secured by a pledge of
40,280 shares of Series A Convertible Preferred Stock and 2,940 shares of
Series C Redeemable Preferred Stock.

55
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with regard to the
beneficial ownership of the Common Stock as of September 13, 1996, and as
adjusted to reflect the sale of the shares of Common Stock being offered
hereby, by (i) each person known by the Company to own beneficially more than
5% of the outstanding shares of Common Stock, (ii) each director of the
Company, its Chief Executive Officer, certain of its other most highly
compensated current executive officers of the Company and each member of the
Executive Officer Group and (iii) all current directors and executive officers
of the Company as a group. Except as otherwise noted, the named beneficial
holder has sole voting and investment power.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAMES AND ADDRESSES OF OWNED BEFORE SHARES BENEFICIALLY
BENEFICIAL HOLDERS OFFERING OWNED AFTER OFFERING
---------------------- ------------------------ --------------------------
NUMBER(1) PERCENT(3) NUMBER(1)(2) PERCENT(3)
--------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
5% Stockholders:
Warburg, Pincus Investors,
L.P. (4)................. 2,997,453 75.3% 3,306,204(5) 48.1%
466 Lexington Avenue
New York, NY 10017
Accel IV L.P. ............ 259,880 6.5% 287,594(6) 4.2%
1 Embarcadero Center
San Francisco, CA 94111
Directors and executive of-
ficers:
James T. Treace........... 136,172(7) 3.4% 150,587(7) 2.2%
F. Barry Bays............. 80,596(8) 2.0% 88,907(8) 1.3%
R. Glen Coleman........... -- * -- *
Guy K. Williamson......... -- * -- *
Thomas E. Timbie.......... 17,643(9) * 18,831(9) *
Mark J. Fletcher.......... 10,000(10) * 10,000(10) *
John R. Treace............ 11,007(11) * 11,488(11) *
Richard B. Emmitt......... 159,594(12) 4.0% 173,193(12) 2.5%
Paul H. Klingenstein...... 277,470(13) 7.0% 307,060(13) 4.5%
William R. Miller......... 5,500 * 5,500 *
Rodman W. Moorhead, III... 2,997,453(14) 75.3% 3,306,204(14) 48.1%
James E. Thomas........... 2,997,453(14) 75.3% 3,306,204(14) 48.1%
Elizabeth H. Weatherman... 2,997,453(14) 75.3% 3,306,204(14) 48.1%
Mark K. Adams (15)........ 80,000 2.0% 80,000 1.2%
David R. Grant (16)....... 9,679 * 10,283 *
Arthur Gertzman (17)...... 7,840 * 8,143 *
Marley Price (18)......... -- * -- *
All current directors and
executive officers as a
group (16 persons)
(12)(13)(14)............. 3,708,308 92.4% 4,085,217 59.1%
</TABLE>
- --------
*Less than 1%.

(1) Except as otherwise indicated, the persons in this table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and subject to the information contained in the footnotes to
this table. Amounts shown for each stockholder include all shares of
Common Stock obtainable upon the Stock Conversion (except that shares
obtainable with respect to accreted dividends upon the conversion of
preferred stock are not included in shares beneficially owned before this
offering), together with shares subject to stock options exercisable
within 60 days of September 13, 1996. Shares not outstanding but deemed
beneficially owned by virtue of the right of a person or group to acquire
them within 60 days are treated as outstanding only for purposes of
determining the number of and percent owned by such person or group.

(2) Amounts shown for each stockholder include all shares of Common Stock
issuable in the Share Exchange, based upon an assumed initial offering
price of $20.00 per share.

56
<PAGE>

(3) The number of shares of Common Stock deemed outstanding before this
offering consists of 679,270 shares of Common Stock outstanding as of
September 13, 1996, 744,652 shares of Common Stock issuable upon
conversion of outstanding shares of Series A Convertible Preferred Stock,
426,777 shares of Common Stock issuable upon conversion of outstanding
shares of Non-Voting Common Stock and 2,127,838 shares of Common Stock
issuable upon conversion of the shares of Non-Voting Common Stock which
are issuable upon conversion of outstanding shares of Series B
Convertible Preferred Stock. The number of shares of Common Stock deemed
outstanding after this offering includes an additional 2,500,000 shares
of Common Stock being offered for sale by the Company in this offering,
314,650 shares of Common Stock issued in the Share Exchange and 86,175
shares of Common Stock issued in the Stock Conversion with respect to
accreted dividends on preferred stock.
(4) The sole general partner of WP Investors is Warburg, Pincus & Co., a New
York general partnership ("WP"). Lionel I. Pincus is the managing partner
of WP and may be deemed to control it. E.M. Warburg, Pincus & Company, a
New York general partnership that has the same general partners as WP
("E.M. Warburg"), manages WP Investors. WP has a 20% interest in the
profits of WP Investors and, through its wholly-owned subsidiary,
Warburg, Pincus, owns 1.13% of the limited partnership interests in WP
Investors. Messrs. Moorhead and Thomas and Ms. Weatherman, each a
director of the Company, are Managing Directors of Warburg, Pincus and
general partners of WP and E.M. Warburg. As such, Messrs. Moorhead and
Thomas and Ms. Weatherman may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act) in an
indeterminate portion of the shares beneficially owned by WP Investors,
Warburg, Pincus, and WP.

(5) Includes 244,915 shares of Common Stock issuable within 30 days of the
closing of this offering in exchange for 46,874 shares of Series C
Redeemable Preferred Stock. An additional 186,217 shares of Series C
Redeemable Preferred Stock held by WP Investors will be redeemed from the
net proceeds of this offering.

(6) Includes 19,918 shares of Common Stock issuable within 30 days of the
closing of this offering in exchange for 3,812 shares of Series C
Redeemable Preferred Stock. An additional 15,144 shares of Series C
Redeemable Preferred Stock held by such person will be redeemed from the
net proceeds of this offering.

(7) Includes 1,083 shares of Common Stock subject to options exercisable
within 60 days of September 13, 1996. Shares beneficially owned after
this offering include 10,362 shares of Common Stock issuable within 30
days of the closing of this offering in exchange for 1,983 shares of
Series C Redeemable Preferred Stock. An additional 7,879 shares of Series
C Redeemable Preferred Stock held by Mr. Treace will be redeemed from the
net proceeds of this offering. Mr. Treace has pledged certain of his
shares to the Company to secure repayment of a loan. Mr. Treace has
pledged 91,929 shares of Common Stock and 6,711 shares of Series C
Redeemable Preferred Stock to WP Investors to secure repayment of a loan
of $1,649,998 from WP Investors used to purchase such shares. The loan
bears interest at an annual rate of 7% and matures on April 16, 2001. See
"Certain Transactions."

(8) Includes 2,708 shares of Common Stock subject to options exercisable
within 60 days of September 13, 1996. Shares beneficially owned after
this offering include 5,974 shares of Common Stock issuable within 30
days of the closing of this offering in exchange for 1,143 shares of
Series C Redeemable Preferred Stock. An additional 4,543 shares of Series
C Redeemable Preferred Stock held by Mr. Bays will be redeemed from the
net proceeds of this offering. Mr. Bays has pledged 52,928 shares of
Common Stock and 3,864 shares of Series C Redeemable Preferred Stock to
WP Investors to secure repayment of a loan of $949,998 from WP Investors
used to purchase such shares. The loan bears interest at an annual rate
of 7% and matures on April 16, 2001.

(9) Includes 6,500 shares of Common Stock subject to options exercisable
within 60 days of September 13, 1996. Shares beneficially owned after
this offering include 854 shares of Common Stock issuable within 30 days
of the closing of this offering in exchange for 163 shares of Series C
Redeemable Preferred Stock. An additional 650 shares of Series C
Redeemable Preferred Stock held by Mr. Timbie will be redeemed from the
net proceeds of this offering. Mr. Timbie has pledged 11,143 shares of
Common Stock and 813 shares of Series C Redeemable Preferred Stock to WP
Investors to secure repayment of a loan of $200,004 from WP Investors
used to purchase such shares. The loan bears interest at an annual rate
of 7% and matures on April 16, 2001.

(10) Represents shares of Common Stock subject to options exercisable within
60 days of September 13, 1996.

(11) Includes 6,500 shares of Common Stock subject to options exercisable
within 60 days of September 13, 1996. Shares beneficially owned after
this offering include 346 shares of Common Stock issuable within 30 days
of the closing of this offering in exchange for 66 shares of Series C
Redeemable Preferred Stock. An additional 263 shares of Series C
Redeemable Preferred Stock held by Mr. Treace will be redeemed from the
net proceeds of this offering.

(12) Includes only shares held by Vertical Fund Associates, L.P. ("Vertical
Fund"). Mr. Emmitt is a Managing Director of The Vertical Group, Inc.,
the general partner of Vertical Fund. As such, Mr. Emmitt may be deemed
to have an indirect pecuniary interest (within the meaning of Rule 16a-1
of the Exchange Act) in an indeterminate portion of the shares
beneficially held by Vertical Fund. Mr. Emmitt disclaims beneficial
ownership of the shares held by Vertical Fund. Shares beneficially owned
after this offering include 11,897 shares of Common Stock held by
Vertical Fund issuable within 30 days of the closing of this offering in
exchange for 2,277 shares of Series C Redeemable Preferred Stock. An
additional 9,046 shares of Series C Redeemable Preferred Stock held by
Vertical Fund will be redeemed from the net proceeds of this offering.

(13) Includes only shares held by Accel IV L.P., Accel Keiretsu L.P., Accel
Investors '94 L.P. and Prosper Partners (collectively, the "Funds"). Mr.
Klingenstein is (i) a general partner of the general partner of Accel IV
L.P.; (ii) an officer of the general partner

57
<PAGE>

of Accel Keiretsu L.P.; (iii) a general partner of Accel Investors '94
L.P.; and (iv) attorney-in-fact for Prosper Partners. As such, Mr.
Klingenstein may be deemed to have an indirect pecuniary interest (within
the meaning of Rule 16a-1 of the Exchange Act) in an indeterminate portion
of the shares beneficially held by the Funds. Mr. Klingenstein disclaims
beneficial ownership of the shares held by the Funds. Shares beneficially
owned after this offering by the Funds include 21,266 shares of Common
Stock issuable within 30 days of the closing of this offering in exchange
for 4,070 shares of Series C Redeemable Preferred Stock. An additional
16,169 shares of Series C Redeemable Preferred Stock held by the Funds will
be redeemed from the net proceeds of this offering.
(14) Includes only shares held by WP Investors, of which Messrs. Moorhead and
Thomas and Ms. Weatherman may be deemed to have beneficial ownership.
Messrs. Moorhead and Thomas and Ms. Weatherman disclaim beneficial
ownership of the shares held by WP Investors.

(15) Mr. Adams's last day of employment with the Company was May 20, 1996.
Includes 60,000 shares of Common Stock subject to options exercisable
within 60 days of September 13, 1996.

(16) Mr. Grant's last day of employment with the Company was June 28, 1996.
Includes 4,000 shares of Common Stock subject to options exercisable
within 60 days of September 13, 1996. Shares beneficially owned after
this offering include 434 shares of Common Stock issuable within 30 days
of the closing of this offering in exchange for 83 shares of Series C
Redeemable Preferred Stock. An additional 330 shares of Series C
Redeemable Preferred Stock held by Mr. Grant will be redeemed from the
net proceeds of this offering.

(17) Mr. Gertzman's last day of employment with the Company was April 30,
1996. Shares beneficially owned after this offering include 218 shares of
Common Stock issuable within 30 days of the closing of this offering in
exchange for 42 shares of Series C Redeemable Preferred Stock. An
additional 165 shares of Series C Redeemable Preferred Stock held by Mr.
Gertzman will be redeemed from the net proceeds of this offering.
(18) Mr. Price's last day of employment with the Company was April 22, 1996.

58
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of (i) 30,000,000
shares of Common Stock, par value $.01 per share; (ii) 4,000,000 shares of
Non-Voting Common Stock, par value $.01 per share; (iii) 1,200,000 shares of
Series A Convertible Preferred Stock, par value $1.00 per share; (iv)
3,500,000 shares of Series B Convertible Preferred Stock, par value $1.00 per
share; (v) 600,000 shares of Series C Redeemable Preferred Stock, par value
$1.00 per share, and (vi) 1,000,000 shares of Preferred Stock, par value $.01
per share.

COMMON STOCK

As of August 20, 1996, there were outstanding 679,270 shares of Common Stock
held of record by 15 persons. Upon the closing of this offering, there will be
outstanding 6,879,362 shares of Common Stock, after giving effect to the Stock
Conversion and the Share Exchange and assuming no exercise of the
Underwriters' over-allotment option or exercise of outstanding options to
purchase an aggregate of 501,191 shares of Common Stock.

Holders of Common Stock are entitled to one vote per share in all matters to
be voted on by the stockholders of the Company and do not have cumulative
voting rights. Subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of the
Company's liabilities and the liquidation preference, if any, of any
outstanding Preferred Stock. Holders of shares of Common Stock have no
preemptive, subscription, redemption or conversion rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All of
the outstanding shares of Common Stock are, and the shares offered by the
Company in this offering will be, when issued and paid for, fully paid and
non-assessable. The rights, preferences and privileges of holders of Common
Stock are, subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. See "Dividend Policy."

NON-VOTING COMMON STOCK

As of September 13, 1996, there were outstanding 426,777 shares of Non-
Voting Common Stock held of record by one institution. Upon the closing of
this offering, there will be outstanding no shares of Non-Voting Common Stock,
after giving effect to the conversion into shares of Non-Voting Common Stock
of all outstanding shares of Series B Convertible Preferred Stock and the
subsequent conversion of all then outstanding Non-Voting Common Stock into
shares of Common Stock.

Holders of Non-Voting Common Stock are not entitled to vote on any matter to
be voted on by the stockholders, except as required by law. Holders of shares
of Non-Voting Common Stock other than WP Investors or its affiliates may elect
at any time to convert their shares of Non-Voting Common Stock into an
equivalent number of fully paid and nonassessable shares of Common Stock. WP
Investors and its affiliates may elect to convert shares of Non-Voting Common
Stock that they hold into an equivalent number of fully paid and nonassessable
shares of Common Stock so long as after giving effect to the conversion WP
Investors and its affiliates collectively own beneficially and of record no
more than 50% of the then outstanding shares of Common Stock. Except with
respect to voting rights and the conversion rights of the Non-Voting Common
Stock, shares of Non-Voting Common Stock have the same powers, rights and
qualifications (including relative, participating, optional and other special
rights, dividend rights, and rights on liquidation, dissolution or winding up)
as shares of Common Stock and rank pari passu with shares of Common Stock.

59
<PAGE>

PREFERRED STOCK

As of September 13, 1996, there were outstanding 744,652 shares of Series A
Convertible Preferred Stock held of record by 16 persons, 2,127,838 shares of
Series B Convertible Preferred Stock held of record by one institution and
299,459 shares of Series C Redeemable Preferred Stock held of record by 22
persons.

The Company anticipates that the holders of the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock will agree that, upon
the closing of this offering the outstanding shares of Series A Convertible
Preferred Stock and the accrued and unpaid dividends thereon will convert into
766,991 shares of Common Stock and the outstanding shares of Series B
Convertible Preferred Stock and the accrued and unpaid dividends thereon will
automatically convert into 2,191,674 shares of Non-Voting Common Stock.
Immediately thereafter, the holder of all then outstanding shares of Non-
Voting Stock will convert such shares into Common Stock. Upon the closing of
this offering, the Company intends to amend the Restated Certificate to
eliminate the Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock. Upon the closing of the Share Exchange, the
Company intends to amend its Restated Certificate of Incorporation (the
"Restated Certificate") to eliminate the Series C Redeemable Preferred Stock.

The holders of shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are entitled to receive quarterly cash dividends
(to the extent of legally available funds) at the rate of six percent per
annum. At the option on the Company, dividends on the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock may be paid in
additional shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, respectively, instead of in cash. Dividends on
the Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock must be paid before any dividends may be set apart or paid upon the
Common Stock or Non-Voting Common Stock in any year. Dividends on the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock began
accruing from April 16, 1996 and are cumulative, whether or not in any fiscal
year there are net profits or surplus available for the payment of dividends
in such fiscal year.

Holders of Series C Redeemable Preferred Stock are not entitled to vote on
any matter to be voted on by the stockholders, except as required by law. The
holders of shares of Series C Redeemable Preferred Stock are entitled to
receive quarterly cash dividends (to the extent of legally available funds) at
the rate of nine percent per annum. At the option of the Company, dividends on
the Series C Redeemable Preferred Stock may be paid in additional shares of
Series C Redeemable Preferred Stock instead of in cash. Dividends on the
Series C Redeemable Preferred Stock must be paid before any dividends may be
set apart for or paid upon the Common Stock or Non-Voting Common Stock in any
year. Dividends on the Series C Redeemable Preferred Stock began accruing from
April 16, 1996 and are cumulative, whether or not in any fiscal year there are
net profits or surplus available for the payment of dividends in such fiscal
year.

The Company is obligated on April 15, 2001 to redeem all outstanding shares
of Series C Preferred Stock (to the extent that such redemption does not
violate any applicable provisions of Delaware law) at a price of $100 per
share, plus an amount equal to any and all dividends accrued and unpaid, but
without interest (the "Series C Redemption Price"). The Company may at any
time, and with the affirmative vote or written consent of the holders of
record of a majority of the shares of Series C Redeemable Preferred Stock then
outstanding, redeem shares of Series C Redeemable Preferred Stock at the
Series C Redemption Price.

The Company will use the balance of the net proceeds of this offering, after
repayment of the Term Loan, plus the net proceeds from the sale of any shares
covered by the Underwriters' over-allotment option, for the redemption of up
to a maximum of $25.0 million of Series C Redeemable Preferred Stock. In the
Share Exchange, all shares of Series C Redeemable Preferred Stock remaining
outstanding immediately following the redemption will be exchanged for shares
of Common Stock, with the number of shares of Common Stock to be issued in
such exchange to be determined by dividing the aggregate redemption price of
such Series C Redeemable Preferred Stock, plus accrued but unpaid dividends,
by the per share initial public offering price.

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<PAGE>

The Board of Directors has the authority, without any further vote or action
by the stockholders, to provide for the issuance of up to 1,000,000 shares of
Preferred Stock from time to time in one or more series with such
designations, rights, preferences and limitations as the Board of Directors
may determine, including the consideration received therefor. The Board also
will have the authority to determine the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences,
sinking fund provisions, conversion rights and voting rights without approval
by the holders of Common Stock. Although it is not possible to state the
effect that any issuance of Preferred Stock might have on the rights of
holders of Common Stock, the issuance of Preferred Stock may have one or more
of the following effects: (i) to restrict Common Stock dividends if Preferred
Stock dividends have not been paid; (ii) to dilute the voting power and equity
interest of holders of Common Stock to the extent that any Preferred Stock
series has voting rights or is convertible into Common Stock; or (iii) to
prevent current holders of Common Stock from participating in the Company's
assets upon liquidation until any liquidation preferences granted to holders
of Preferred Stock are satisfied. In addition, the issuance of Preferred Stock
may, under certain circumstances, have the effect of discouraging a change in
control of the Company by, for example, granting voting rights to holders of
Preferred Stock that require approval by the separate vote of the holders of
Preferred Stock for any amendment to the Restated Certificate or any
reorganization, consolidation, merger or other similar transaction involving
the Company. As a result, the issuance of such Preferred Stock may discourage
bids for the Common Stock at a premium over the market price therefor, and
could have a materially adverse effect on the market value of the Common
Stock. See "Risk Factors--Effect of Certain Charter and By-Law Provisions."

REGISTRATION RIGHTS

In connection both with the formation of the Company and its acquisition of
TreBay, the Company granted certain rights with respect to the registration of
an aggregate of 4,340,429 shares of Common Stock held by certain stockholders
(the "Investors"), after giving effect to the Stock Conversion and the Share
Exchange (collectively, the "Registrable Securities"). Such registration
rights also extend to any capital stock of the Company issued as a dividend or
other distribution with respect to, or in exchange for or in replacement of,
the shares of Common Stock referred to above and any additional shares of
Common Stock which any of the Investors may hereafter acquire. Certain of the
Investors hold options to purchase an aggregate of 298,416 shares of Common
Stock. The shares obtained upon the exercise of such options also will be
Registrable Securities. A holder or holders of the Registrable Securities
(each a "Holder") who (i) prior to this offering, are a Holder or Holders of
more than 50% of the then outstanding Registrable Securities; or (ii)
following this offering, are a Holder or Holders of more than 20% of the then
outstanding Registrable Securities (each, an "Initiating Holder") are entitled
to request that the Company file a registration statement under the Securities
Act covering the sale of some or all of the Registrable Securities owned by
such holders, subject to certain conditions. The Company is required to effect
no more than two such registrations (three if the prior two registrations did
not include WP Investors as an Initiating Holder). The Company is not required
to effect any such registration if the anticipated aggregate public offering
price of the shares of Common Stock proposed to be registered is less than
$5.0 million. If officers or directors of the Company holding other securities
of the Company shall request inclusion in any such registration, or if holders
of securities of the Company other than Registrable Securities who are
entitled, by contract with the Company or otherwise, to have securities
included in such a registration (the "Other Stockholders") request such
inclusion, the Holders shall offer to include the securities of such officers,
directors and Other Stockholders in any underwriting involved in such
registration, provided, among other conditions, that the underwriter
representative of any such offering has the right, subject to certain
conditions, to limit the number of Registrable Securities included in the
registration. In addition, in the event that the Company proposes to register
any of its securities under the Securities Act (other than registrations
relating solely to employee benefit plans or pursuant to Rule 145 or on a form
which does not permit secondary sales or does not include substantially the
same information as would be required to be included in a registration
statement covering the sale of Registrable Securities), either for its own
account or for the account of other security holders or holders exercising
their respective demand

61
<PAGE>

registration rights, holders of Registrable Securities may require the Company
to include all or a portion of their Registrable Securities in the
registration and in any underwriting involved therein, provided, among other
conditions, that the underwriter representative of any such offering has the
right, subject to certain conditions, to limit the number of Registrable
Securities included in the registration. Further, once the Company is
qualified to use Form S-3 to register securities under the Securities Act, the
holders of Registrable Securities shall have the right to request three
registrations on Form S-3 to register all or a portion of such shares under
the Securities Act, subject to certain conditions. In general, all fees, costs
and expenses of such registrations (other than underwriting discounts and
selling commissions applicable to sales of the Registrable Securities and all
fees and disbursements of counsel for each of the Holders) will be borne by
the Company.

LIMITATIONS ON DIRECTORS' LIABILITY

The Restated Certificate and Restated By-laws limit the liability of
directors and officers to the maximum extent permitted by Delaware law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
including gross negligence, except liability for (i) breach of the directors'
and officers' duty of loyalty; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law; (iii)
the unlawful payment of a dividend or unlawful stock purchase or redemption;
and (iv) any transaction from which the director or officer derives an
improper personal benefit. Delaware law does not permit a corporation to
eliminate a director's or an officer's duty of care, and this provision of the
Restated Certificate has no effect on the availability of equitable remedies,
such as injunction or rescission, based upon a director's breach of the duty
of care.

These provisions will not limit liability under state or federal securities
laws. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors.

POSSIBLE ISSUANCES OF PREFERRED STOCK

The Company has amended its Restated Certificate to authorize the issuance
of Preferred Stock without stockholder approval and upon such terms as the
Board of Directors may determine. This amendment could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring or making a proposal to acquire, a majority of the
outstanding stock of the Company. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of holders of
Preferred Stock that may be issued in the future. The Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock" and "Risk Factors--Effect of Certain Charter and By-
Law Provisions."

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that
such a stockholder became an interested stockholder, unless (i) the
corporation has elected in its original certificate of incorporation not to be
governed by Section 203 (the Company did not make such an election); (ii) the
business combination was approved by the Board of Directors of the corporation
before the other party to the business combination became an interested
stockholder; (iii) upon consummation of the transaction that made it an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the commencement of the
transaction (excluding voting stock owned by directors who are also officers
or held in employee benefit plans in which the employees do not have a
confidential right to tender or vote stock held by the plan); or (iv) the
business combination was

62
<PAGE>

approved by the Board of Directors of the corporation and ratified by two-
thirds of the voting stock which the interested stockholder did not own. The
three-year prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of the
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder, transactions with an interested
stockholder involving the assets or stock of the corporation or its majority-
owned subsidiaries and transactions which increase an interested stockholder's
percentage ownership of stock. The term "interested stockholder" is defined
generally as a stockholder who, together with affiliates and associates, owns
(or, within three years prior, did own) 15% or more of a Delaware
corporation's voting stock. Section 203 could prohibit or delay a merger,
takeover or other change in control of the Company and therefore could
discourage attempts to acquire the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar of the Company's Common Stock is First
Union Bank of North Carolina.

63
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the offering there has been no market for the shares of the Common
Stock of the Company. The Company can make no predictions as to the effect, if
any, that sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
significant amounts of the Common Stock in the public market, or the
perception that such sales may occur, could adversely affect prevailing market
prices. See "Risk Factors--Shares Eligible for Future Sale; Potential for
Adverse Effect on Stock Price."

Upon completion of this offering, the Company expects to have 6,879,362
shares of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option. Of these shares, the 2,500,000 shares of Common Stock
sold in this offering will be freely tradeable without restriction under the
Securities Act, except for any such shares which may be acquired by an
"affiliate" of the Company (an "Affiliate") as that term is defined in Rule
144 under the Securities Act, which shares will be subject to the resale
limitations of Rule 144.

An aggregate of approximately 4,379,362 shares of Common Stock held by
existing stockholders upon completion of this offering and the Share Exchange
will be "restricted securities" (as that phrase is defined in Rule 144) and
may not be resold in the absence of registration under the Securities Act or
pursuant to exemptions from such registration, including among others, the
exemption provided by Rule 144 under the Securities Act. Except as described
below, ninety days after the date of this Prospectus, approximately 108,900
shares of Common Stock (plus 137,816 shares issuable upon exercise of then
vested options) will be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act. In addition, approximately 4,206,711 shares
will be eligible for sale in the public market under Rule 144, subject to the
volume limitations and other restrictions described below, 90 days after the
date of this Prospectus and 48,399 shares will be eligible for sale without
restriction under Rule 144(k).

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least two years has elapsed
since the later of the date the "restricted securities" were acquired from the
Company and the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell a
number of shares within any three-month period that does not exceed the
greater of 1% of the then outstanding shares of the Common Stock
(approximately 68,794 shares immediately after this offering) or the average
weekly reported volume of trading of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. The holder may only
sell such shares through unsolicited brokers' transactions. Sales under Rule
144 are also subject to certain requirements pertaining to the manner of such
sales, notices of such sales and the availability of current public
information concerning the Company. Affiliates may sell shares not
constituting restricted shares in accordance with the foregoing volume
limitations and other requirements but without regard to the two-year holding
period. Under Rule 144(k), if a period of at least three years has elapsed
between the later of the date restricted securities were acquired from the
Company and the date they were acquired from an Affiliate, as applicable, a
holder of such restricted securities who is not an Affiliate at the time of
the sale and has not been an Affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately without regard to the
volume limitations and other conditions described above.

Any employee of the Company who purchased his or her shares of Common Stock
pursuant to a written compensation plan or contract may be entitled to rely on
the resale provisions of Rule 701 under the Securities Act, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
current public information, holding period, volume limitation or notice
provision of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding period restrictions.

64
<PAGE>

The Company intends to file as soon as practicable after the closing of this
offering a registration statement on Form S-8 under the Securities Act to
register approximately 669,100 shares of Common Stock reserved for issuance
under the Stock Option Plan, including, in some cases, shares for which an
exemption under Rule 144 or Rule 701 would also be available, thus permitting
the resale of shares issued under the Stock Option Plan by non-affiliates in
the public market without restriction under the Securities Act. Such
registration statement is expected to become effective immediately upon
filing, whereupon shares registered thereunder will become eligible for sale
in the public market, subject to vesting and, in certain cases, subject to the
lock-up agreements described below. At the date of this Prospectus, options to
purchase an aggregate of 501,191 shares of Common Stock are outstanding under
the Stock Option Plan.

Notwithstanding the foregoing, in connection with this offering, the Company
and certain of its executive officers, directors and stockholders, who will
own an aggregate of approximately 4,093,014 shares of Common Stock after this
offering and the Share Exchange, have agreed that, without the prior written
consent of Alex. Brown & Sons Incorporated on behalf of the Underwriters, they
will not offer, sell, sell short or otherwise dispose of any shares of Common
Stock or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Stock or derivatives of
Common Stock owned by such person or request the registration for the offer or
sale of any of the foregoing (or as to which such person has the right to
direct the disposition of) for a period of 180 days after the date of this
Prospectus, directly or indirectly. In its sole discretion and at any time
without notice, Alex. Brown & Sons Incorporated may release all or any portion
of the shares subject to lock-up agreements.

The holders of approximately 4,340,429 shares, after giving effect to the
Stock Conversion and the Share Exchange, will be entitled to certain
registration rights with respect to their shares. See "Description of Capital
Stock--Registration Rights."

65
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and UBS Securities LLC, have severally agreed
to purchase from the Company the following respective numbers of shares of
Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Alex. Brown & Sons Incorporated...................................
UBS Securities LLC................................................
---------
Total........................................................... 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.

The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the initial
public offering, the offering price and other selling terms may be changed by
the Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 2,500,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 2,500,000 shares are being offered.

Up to five percent of the shares of Common Stock offered hereby may be
reserved for sale to the Company's employees and certain other persons. Sales
of shares to such persons will be at the initial public offering price. The
number of shares available for sale to the general public may be reduced to
the extent such persons purchase such reserved shares. Any reserved shares not
so purchased will be offered by the Underwriters to the general public on the
same terms as the other shares offered hereby.

The Company has agreed to indemnify the Underwriters and certain controlling
persons against certain liabilities, including liabilities under the
Securities Act.

The Company and each of its directors and executive officers and certain of
its shareholders have agreed not to offer, sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated, except that the Company may issue, and grant options to
purchase, shares of Common Stock under the Stock Option Plan, and other
currently outstanding options. See "Shares Eligible for Future Sale."

66
<PAGE>

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price of the Common
Stock will be determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors to be considered in
such negotiations are prevailing market conditions, the results of operations
of the Company in recent periods, the market capitalization and stages of
development of other companies which the Company and the Representatives of
the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present stage of the Company's
development and other factors deemed relevant.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Willkie Farr & Gallagher, New York, New York. Certain legal matters
relating to this offering will be passed upon for the Underwriters by Davis
Polk & Wardwell, New York, New York.

EXPERTS

The consolidated financial statements as of December 31, 1995 and for each
of the three years in the period ended December 31, 1995 of the Company, the
combined financial statements as of December 31, 1993 and April 15, 1994 and
for the year ended December 31, 1993 and for the three and one-half months
ended April 15, 1994 of Xomed, Inc. and the financial statements as of
December 31, 1994 and December 31, 1995 and for each of the two years in the
period ended December 31, 1995 of TreBay Medical Corporation included in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement and have been so included in reliance
on their reports given on their authority as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission under the Securities Act a
Registration Statement on Form S-1 with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement in accordance with the rules and regulations of the
Commission. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part hereof. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily complete
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's Regional Offices in New York (Seven World Trade
Center, New York, New York 10007) and Chicago (Suite 1400, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60611). Copies of such material can
be obtained from the public reference section of the Commission at prescribed
rates by writing to the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web
site that contains reports and information statements and other materials that
are filed through the Commission's Electronic Data Gathering, Analysis, and
Retrieval System. The Web site can be accessed at http://www.sec.gov.

67
<PAGE>

The Company intends to distribute to its stockholders annual reports
containing audited financial statements and quarterly reports containing
unaudited interim financial information for the first three quarters of each
fiscal year of the Company.

----------------

EndoScrub(R), NIM-2(R), NIM-2(R) XL, Laser-Shield II(R), MPS 2000(R), Redi-
Bur (R) and Skeeter(R) are registered trademarks of the Company. Wizard,
Wizard Plus, Activent, Typhoon, Sharpsite, Lightstar, Digistar Plus, XPS and
Powerforma are trademarks of the Company. This Prospectus also includes
trademarks of companies other than the Company.

68
<PAGE>

INDEX TO FINANCIAL STATEMENTS

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1994, and June 29,
1996 (Unaudited) and July 1, 1995 (Unaudited)............................. F-4
Consolidated Statements of Operations for the Three Years Ended December
31, 1995 and the Six Months Ended June 29, 1996 (Unaudited) and July 1,
1995 (Unaudited).......................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the Three
Years Ended December 31, 1995 and the Six Months Ended June 29, 1996 (Un-
audited) ................................................................. F-6
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1995 and the Six Months Ended June 29, 1996 (Unaudited) and July 1,
1995 (Unaudited).......................................................... F-8
Notes to Consolidated Financial Statements................................. F-9
</TABLE>

XOMED, INC.

<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-22
Combined Balance Sheets at December 31, 1993 and April 15, 1994........... F-23
Combined Statements of Income and Retained Earnings for the Year Ended
December 31, 1993 and Three and One-Half Months Ended April 15, 1994..... F-24
Combined Statements of Cash Flows for the Year Ended December 31, 1993 and
the Three and
One-Half Months Ended April 15, 1994..................................... F-25
Notes to the Combined Balance Sheet....................................... F-26
</TABLE>

TREBAY MEDICAL CORPORATION

<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-32
Balance Sheets at December 31, 1994 and 1995 and April 1, 1995 (Unaudited)
and March 30, 1996 (Unaudited)........................................... F-33
Statements of Operations for the Two Years Ended December 31, 1995 and the
Three Months Ended April 1, 1995 (Unaudited) and March 30, 1996 (Unau-
dited)................................................................... F-34
Statements of Shareholders' Equity for the Two Years Ended December 31,
1995 and the Three Months Ended March 30, 1996 (Unaudited)............... F-35
<CAPTION>
Statements of Cash Flows for the Two Years Ended December 31, 1995 and the
Three Months Ended April 1, 1995 (Unaudited) and March 30, 1996
(Unaudited).............................................................. F-36
<S> <C>
Notes to Financial Statements............................................. F-37
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Xomed Surgical Products, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Xomed
Surgical Products, Inc. and Subsidiaries (the Company) as of December 31, 1994
and 1995, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Xomed Surgical Products, Inc. and Subsidiaries at December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.

Ernst & Young LLP

Jacksonville, Florida

June 19, 1996, except for the 4th paragraph of footnote No. 8 for which the
date is September 3, 1996

F-2
<PAGE>

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F-3
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
JULY 1, JUNE 29,
1994 1995 1995 1996
------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 260 $ 417 $ 446 $ 521
Accounts receivable, less allowance for
doubtful accounts of $358 and $483 at De-
cember 31, 1994 and 1995, respectively... 8,889 11,951 9,104 9,666
Other receivables......................... 479 1,348 444 225
Inventories............................... 12,529 11,994 11,104 14,412
Prepaid expenses.......................... 668 564 448 507
Income taxes receivable................... 442 274 -- --
Deferred income taxes..................... 1,816 1,379 1,816 2,718
------- ------- ------- -------
Total current assets....................... 25,083 27,927 23,362 28,049
Investments................................ 1,199 861 861 531
Notes receivable from officers............. 332 332 332 --
Property, plant and equipment, net......... 13,854 15,355 14,541 16,383
Cost in excess of net assets acquired, net. 54,300 46,381 53,182 47,054
Other assets............................... 952 2,068 659 2,841
Deferred income taxes...................... -- 199 -- 1,229
------- ------- ------- -------
Total assets............................... $95,720 $93,123 $92,937 $96,087
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 2,177 $ 5,841 $ 3,099 $ 4,616
Accrued expenses.......................... 5,061 4,512 4,667 4,075
Accrued restructuring costs............... 1,740 695 578 3,061
Current portion long-term debt and capital
lease obligations........................ 3,361 4,645 4,611 5,236
------- ------- ------- -------
Total current liabilities.................. 12,339 15,693 12,955 16,988
Long-term debt and capital lease
obligations, less current portion......... 36,106 32,719 31,980 30,322
Deferred income taxes...................... 732 -- 732 444
Redeemable preferred stock:
Series C, nonvoting, cumulative, $1.00 par
value, 600,000 shares authorized, 299,459
shares issued and outstanding (aggregate
liquidation value of $30,619)............ 28,996 31,454 30,224 30,619
Shareholders' equity (deficit):
Redeemable convertible preferred stock:
Series A, convertible, voting,
cumulative, $1.00 par value; 1,200,000
shares authorized, 744,652 shares issued
and outstanding (aggregate liquidation
value of $7,241)........................ 3,632 3,841 3,736 7,241
Series B, convertible, nonvoting, cumula-
tive, $1.00 par value; 3,500,000 shares
authorized, 2,127,838 shares issued and
outstanding (aggregate liquidation value
of $20,690)............................. 21,251 22,474 21,863 20,690
Common stock:
Common Stock, voting, $.01 par value;
30,000,000 shares authorized, 679,270
shares issued and outstanding........... 6 6 6 7
Non-Voting Common Stock, non-voting, $.01
par value; 4,000,000 shares authorized,
426,777 shares issued and outstanding... 4 4 4 4
Accumulated deficit....................... (6,997) (12,719) (8,214) (10,153)
Shareholders' notes receivable............ (349) (349) (349) (187)
Additional paid-in capital................ -- -- -- 112
------- ------- ------- -------
Total shareholders' equity................. 17,547 13,257 17,046 17,714
------- ------- ------- -------
Total liabilities and shareholders' equity. $95,720 $93,123 $92,937 $96,087
======= ======= ======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31, SIX MONTHS ENDED
------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales, net....................... $10,071 $42,475 $59,865 $29,424 $ 32,942
Cost of sales.................... 2,876 19,233 23,175 11,605 12,690
------- ------- ------- ------- --------
Gross profit..................... 7,195 23,242 36,690 17,819 20,252
Operating expenses:
Selling, general and adminis-
trative....................... 6,074 19,126 27,077 12,440 14,129
Research and development....... 311 1,958 2,405 1,158 1,669
Amortization of intangibles.... 394 2,652 2,579 1,224 1,168
Write-off of acquired research
and development............... -- -- -- -- 3,612
Restructuring charges.......... -- -- -- -- 3,093
------- ------- ------- ------- --------
Total operating expenses......... 6,779 23,736 32,061 14,822 23,671
------- ------- ------- ------- --------
Operating income (loss) from
continuing operations........... 416 (494) 4,629 2,997 (3,419)
Interest expense................. (102) (2,148) (3,063) (1,579) (1,536)
Other income (expense), net...... 26 313 114 (136) 64
------- ------- ------- ------- --------
Income (loss) from continuing
operations before income tax
expense (benefit)............... 340 (2,329) 1,680 1,282 (4,891)
Income tax expense (benefit)..... 121 (774) 1,355 855 (1,956)
------- ------- ------- ------- --------
Income (loss) from continuing
operations...................... 219 (1,555) 325 427 (2,935)
Discontinued operations:
Income from operations of dis-
continued surgical drapes seg-
ment (less applicable income
tax expense of $309, $203 and
$197 for the period ended De-
cember 31, 1994, 1995 and July
1, 1995, respectively)........ -- 463 306 295 --
Loss on disposal of surgical
drapes segment (less applica-
ble income tax benefit of -- -- (2,485) -- --
$1,386)....................... ------- ------- ------- ------- --------
Net income (loss)................ $ 219 $(1,092) $(1,854) $ 722 $ (2,935)
======= ======= ======= ======= ========
Pro forma:
Income (loss) from continuing
operations.................... $ 68 $ (2,934)
Preferred stock dividends...... -- 538
------- --------
Income (loss) from continuing
operations available to common
shareholders.................. 68 (3,472)
Interest expense, net of taxes. 1,300 581
------- --------
Supplementary income (loss) $ 1,368 $ (2,891)
from continuing operations.... ======= ========
Pro forma per share:
Income (loss) from continuing
operations available to common $ .01 $ (.75)
shareholders.................. ======= ========
Supplementary income (loss)
from continuing operations
available to common $ .30 $ (.62)
shareholders.................. ======= ========
Pro forma weighted average common 4,632 4,635
shares outstanding.............. ======= ========
Supplementary pro forma weighted
average common shares 7,132 7,135
outstanding..................... ======= ========
</TABLE>
See accompanying notes.

F-5
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------
SERIES A SERIES B
--------------- ------------------
SHARES AMOUNT SHARES AMOUNT
------- ------ --------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............. 68,900 $8,268 8,498 $ 985
Net income................................ -- -- -- --
Stock options exercised................... -- -- -- --
Accretion of cumulative preferred stock -- 689 -- 68
dividends................................ ------- ------ --------- -------
Balance at December 31, 1993.............. 68,900 8,957 8,498 1,053
Recapitalization of company, April 15,
1994:
Exchange of outstanding shares.......... (68,900) (8,957) (8,498) (1,053)
Issuance of shares...................... 340,454 3,262 2,127,838 20,385
Net loss.................................. -- -- -- --
Stock repurchase, August 1994............. -- -- -- --
Stock sale................................ 23,761 227 -- --
Dividends paid, August 1994............... -- -- -- --
Accretion of cumulative preferred stock
dividends................................ -- 143 -- 866
Shareholders' notes receivable............ -- -- -- --
------- ------ --------- -------
Balance at December 31, 1994.............. 364,215 3,632 2,127,838 21,251
Net loss.................................. -- -- -- --
Stock options exercised................... -- -- -- --
Accretion of cumulative preferred stock -- 209 -- 1,223
dividends................................ ------- ------ --------- -------
Balance at December 31, 1995.............. 364,215 3,841 2,127,838 22,474
Unaudited:
Net loss................................. -- -- -- --
Accretion of cumulative preferred stock
dividends............................... -- 159 -- 611
Forgiveness of cumulative preferred stock
dividends............................... -- (404) -- (2,395)
Stock options exercised.................. -- -- -- --
Shareholders stock returned.............. (9,563) (91) -- --
Acquisition of TreBay Medical............ 390,000 3,736 -- --
------- ------ --------- -------
Balance at June 29, 1996.................. 744,652 $7,241 2,127,838 $20,690
======= ====== ========= =======
</TABLE>

See accompanying notes.

F-6
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
NON-VOTING
COMMON STOCK COMMON STOCK SHAREHOLDERS' ADDITIONAL PREDECESSOR
- -------------------------------- ACCUMULATED NOTE PAID-IN BASIS
SHARES AMOUNT SHARES AMOUNT DEFICIT RECEIVABLE CAPITAL ADJUSTMENT TOTAL
- -------- ------ ------- ------ ----------- ------------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
290,355 $ 3 -- $-- $(1,180) $ -- $ 287 $(1,677) $ 6,686
1,375 -- -- -- -- -- 1 -- 1
-- -- -- -- 219 -- -- -- 219
-- -- -- -- (757) -- -- -- --
- -------- --- ------- ---- -------- ----- ----- ------- -------
291,730 3 -- -- (1,718) -- 288 (1,677) 6,906
(291,730) (3) -- -- 2,270 -- (288) 1,677 (6,354)
574,471 6 426,777 4 (3,653) -- -- -- 20,004
-- -- -- -- (1,092) -- -- -- (1,092)
(1,351) -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- 227
-- -- -- -- (105) -- -- -- (105)
-- -- -- -- (2,699) -- -- -- (1,690)
-- -- -- -- -- (349) -- -- (349)
- -------- --- ------- ---- -------- ----- ----- ------- -------
573,120 6 426,777 4 (6,997) (349) -- -- 17,547
-- -- -- -- (1,854) -- -- -- (1,854)
19,000 -- -- -- -- -- 22 -- 22
-- -- -- -- (3,868) -- (22) -- (2,458)
- -------- --- ------- ---- -------- ----- ----- ------- -------
592,120 6 426,777 4 (12,719) (349) -- -- 13,257
-- -- -- -- (2,935) -- -- -- (2,935)
-- -- -- -- (2,058) -- -- -- (1,288)
-- -- -- -- 7,559 -- -- -- 4,760
87,150 1 -- -- -- -- 112 -- 113
-- -- -- -- -- 162 -- -- 71
-- -- -- -- -- -- -- -- 3,736
- -------- --- ------- ---- -------- ----- ----- ------- -------
679,270 $ 7 426,777 $ 4 $(10,153) $(187) $ 112 $ -- $17,714
======== === ======= ==== ======== ===== ===== ======= =======
</TABLE>

F-7
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
-------------------------- -----------------
JULY 1, JUNE 29,
1993 1994 1995 1995 1996
------ -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............... $ 219 $ (1,092) $ (1,854) $ 722 $ (2,935)
Adjustments to reconcile net
income (loss) to net cash
provided by
operating activities:
Depreciation................... 349 1,549 2,038 1,014 1,209
Amortization of intangibles.... 394 2,825 2,702 1,346 1,168
Loss on disposal of property
and equipment................. -- 742 4,963 -- --
Write-off of acquired research
and development............... -- -- -- -- 3,612
Changes in operating assets
and liabilities net of
effects of
purchased business
(Increase) decrease in
accounts and other
receivables, net............ (587) (1,038) (3,228) (180) 3,545
(Increase) decrease in
inventories, net............ (62) 3,786 535 1,425 (1,990)
(Increase) decrease in
deferred income taxes....... 49 628 (494) -- (3,016)
(Increase) decrease in other
assets...................... (88) (538) 130 732 (850)
Increase (decrease) in
accounts payable and accrued
expenses.................... 298 2,442 2,510 528 (1,736)
(Decrease) increase in
accrued restructuring -- (5,315) (1,045) (1,162) 2,366
costs....................... ------ -------- -------- ------- --------
Net cash provided by operating
activities..................... 572 3,989 6,257 4,425 1,373
INVESTING ACTIVITIES
Purchases of property and equip-
ment........................... (448) (2,183) (2,969) (1,701) (1,668)
Loans to officers............... -- (332) -- -- --
Proceeds from certificates of
deposit........................ -- -- 338 338 330
Purchase of other assets........ -- -- (1,388) -- (32)
Other........................... -- -- -- (166)
Purchases of businesses......... (155) (80,873) -- -- 2,000
------ -------- -------- ------- --------
Net cash (used in) provided by
investing activities........... (603) (83,388) (4,019) (1,363) 464
FINANCING ACTIVITIES
Proceeds from issuance of debt.. -- 45,919 -- -- --
Proceeds from revolving line of
credit......................... 600 9,275 28,810 11,611 14,706
Payments on revolving line of
credit......................... (117) (15,692) (24,986) (11,708) (13,725)
Payments on term notes payable.. -- (2,684) (5,732) (2,500) (2,771)
Payments on capital lease obli-
gation......................... -- (117) (195) (279) (56)
Issuance of stock............... 1 43,503 22 -- 113
Repurchases of redeemable pre- -- (1,870) -- -- --
ferred stock................... ------ -------- -------- ------- --------
Net cash provided by (used in) 484 78,334 (2,081) (2,876) (1,733)
financing activities........... ------ -------- -------- ------- --------
Net increase (decrease) in cash
and cash equivalents........... 453 (1,065) 157 186 104
Cash and cash equivalents at be- 872 1,325 260 260 417
ginning of period.............. ------ -------- -------- ------- --------
Cash and cash equivalents at end $1,325 $ 260 $ 417 $ 446 $ 521
of period...................... ====== ======== ======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period
for:
Interest....................... $ 102 $ 2,205 $ 3,118 $ 1,681 $ 1,172
====== ======== ======== ======= ========
Taxes.......................... $ 161 $ 428 $ 228 $ -- $ --
====== ======== ======== ======= ========
Increase in preferred stock
attributable to accretion of
cumulative
preferred stock dividends:
Series A....................... $ 699 $ 143 $ 209 $ 104 $ 52
Series B....................... -- 866 1,223 614 306
Series C....................... -- 143 2,458 1,228 614
------ -------- -------- ------- --------
$ 699 $ 1,152 $ 3,890 $ 1,946 $ 972
====== ======== ======== ======= ========
</TABLE>

See accompanying notes.

F-8
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

1. ORGANIZATION

Xomed Surgical Products, Inc. (the Company), a Delaware corporation,
acquired all of the outstanding stock of Xomed-Treace, Inc. and Xomed-Treace,
P.R. Inc. (collectively Xomed-Treace) and Merocel Corporation (Merocel) on
April 15, 1994. As the owners of the Company are also owners of Merocel, these
transactions have been accounted for as if Xomed-Treace were acquired by
Merocel. Therefore, the assets and liabilities of Merocel were not revalued
and are presented in the accompanying balance sheet at historical cost.

The acquisition of Xomed-Treace has been accounted for under the purchase
method of accounting. Accordingly, the purchase price of approximately $81,000
was allocated to the individual assets acquired and liabilities assumed of
Xomed-Treace based upon their respective fair values at the date of
acquisition. The transaction resulted in cost in excess of net assets acquired
of $55,988. The acquisition was funded primarily through the issuance of
preferred stock ($43,503) and proceeds from long-term debt.

Xomed is a leading developer, manufacturer and marketer of surgical products
for use by ear, nose and throat (ENT) specialists. The Company offers a broad
line of products in its core ENT market that includes powered tissue-removal
systems and other microendoscopy instruments, implantable devices, nerve
monitoring systems and disposable fluid-control products. The Company also
offers a line of ophthalmic and other products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of the Company includes the accounts
of Merocel and subsidiary and Xomed and subsidiaries. Significant intercompany
transactions and balances between entities have been eliminated.

Basis of Presentation--Unaudited Interim Financial Statements

The accompanying unaudited financial statements as of July 1, 1995 and June
29, 1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six
months ended June 29, 1996 is not necessarily indicative of the results that
may be expected for the year ended December 31, 1996.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original
maturities of three months or less when purchased to be cash equivalents.

F-9
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventory Valuation

Inventories are generally stated at average cost on a first-in, first-out
valuation basis not in excess of market. Market for raw materials is based on
replacement costs and for work-in-process and finished goods on net realizable
value.

Investments

Investments consist of certificates of deposit with maturities ranging from
one to three years and are stated at cost which approximates market value.
These certificates of deposit were purchased in connection with a tax
exemption grant from the government of Puerto Rico, for a period not to exceed
five years.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The costs and accumulated
depreciation related to assets sold or retired are removed from the accounts
and any gain or loss is credited or charged to income. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets not exceeding forty years.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes", which
requires the use of the liability method of accounting for deferred income
taxes.

Translation Adjustments

The remeasurement gains and losses of foreign currencies related to foreign
operations are included in income (loss) from operations and totaled $50,000
(loss) and $67,000 (gain) for the years ended December 31, 1994 and 1995,
respectively. There were no foreign operations in 1993.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

New Accounting Pronouncements

In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for the
expected disposition of long-lived assets.

The FASB also issued Statement No. 123, Accounting for Stock-Based
Compensation, which provides an alternative for income statement recognition
of costs associated with stock-based employee compensation plans and requires
expanded disclosures with respect to such plans.

The Company will adopt Statement No. 121 and the disclosure requirements of
No. 123 in 1996 and, based on current information, does not believe the effect
of adoption will be material to the financial position or results of
operations of the Company.

F-10
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

3. DISCONTINUED OPERATIONS

During July 1995, the Company finalized an agreement for the disposal of all
operating assets, inventory, patents and license agreements of its surgical
drapes segment in exchange for cash, notes receivable, inventory, fixed
assets, patents and license agreements of several otology product lines of
another nonrelated entity. Management decided the surgical drapes were not
part of the Company's core business and disposed of this product line in
exchange for the head and neck product line of another entity which is more
compatible with the Company's other products. The operating results of the
otology product lines were not significant to the Company's overall results of
operations during 1995.

Certain financial information related to the surgical drapes product line,
which was acquired from Xomed-Treace on April 15, 1994, is as follows:

<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS
DECEMBER 31, ENDED
------------------ JULY 1,
1993 1994 1995 1995
---- ------ ------ -------
<S> <C> <C> <C> <C>
Sales................................................ $-- $5,586 $5,385 $3,699
==== ====== ====== ======
Pre-tax income....................................... $-- $ 772 $ 509 $ 493
==== ====== ====== ======
Income tax expense................................... $-- $ 309 $ 203 $ 198
==== ====== ====== ======
Net income........................................... $-- $ 463 $ 306 $ 295
==== ====== ====== ======
</TABLE>
The surgical drapes business accounts consisted principally of inventory and
fixed assets aggregating approximately $1,250 on the date of disposition.
Interest expense attributed to the drapes business was $79 and $56 for 1994
and 1995, respectively. The Company realized a net loss of $2,485, after
income tax benefits of $1,386, on this transaction and has restated its
financial statements for the discontinued operations. Cash received on the
transaction totaled $1,316. Included in other receivables and other assets at
December 31, 1995 are notes receivable of approximately $1,000 and $750,
respectively, related to this transaction. As part of the transaction both
parties agreed to manufacture their existing products through the end of 1995
and supply those products to the other party at cost. As a result of this
agreement, amounts totaling $1,704 and $1,564 are included in trade
receivables and accounts payable, respectively, at December 31, 1995.

4. INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE
--------------- JULY 1, 29,
1994 1995 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Finished goods................................. $ 6,581 $ 6,695 $ 5,881 $ 7,519
Work in process................................ 1,675 1,572 2,219 1,867
Raw materials and packaging.................... 4,273 3,727 3,004 5,026
------- ------- ------- -------
$12,529 $11,994 $11,104 $14,412
======= ======= ======= =======
</TABLE>

F-11
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, at cost, less allowances for depreciation, is
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Land and land improvements.............................. $ 1,413 $ 1,413
Building and building improvements...................... 5,525 6,061
Machinery and equipment................................. 8,026 10,625
------- -------
14,964 18,099
Allowances for depreciation............................. (2,315) (4,353)
------- -------
12,649 13,746
Capital projects in process............................. 1,205 1,609
------- -------
$13,854 $15,355
======= =======
</TABLE>

Depreciation expense, including expense on assets under capital lease
obligations, is approximately $349, $1,549 and $2,038 for the years ended
December 31, 1993, 1994 and 1995, respectively.

6. COST IN EXCESS OF NET ASSETS ACQUIRED

The cost in excess of net assets acquired relates to goodwill in the
acquisition of Xomed, which is being amortized over 25 years and is summarized
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Cost in excess of net assets acquired at purchase
date................................................. $55,988 $55,988
Other/purchase price adjustments...................... (105) (105)
Surgical drape product line disposition............... -- (5,805)
Amortization.......................................... (1,583) (3,697)
------- -------
Cost in excess of net assets acquired at end of peri-
od................................................... $54,300 $46,381
======= =======
</TABLE>

The Company periodically assesses the recoverability of goodwill based on
the cash flows, profitability and changes in the operations of the businesses
acquired.

7. ACCRUED RESTRUCTURING COSTS

Incident to the acquisition of Xomed, the Company initiated a plan to
restructure certain of its operations. Included in accrued restructuring costs
of $1,740 and $695 at December 31, 1994 and 1995, respectively, are the
remaining estimated costs associated with closing a plant facility and
significantly reducing the Company's workforce.

F-12
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

The Company was obligated under long-term debt and capital lease obligations
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------- -----------
<S> <C> <C>
Term notes payable to financial institutions in
quarterly principal installments ranging from $975
to $1,775 through April 15, 1999, plus interest
payable quarterly (interest at LIBOR (5.71875% at
December 31, 1995) plus 2.25% or lender's base
rate plus 1%)..................................... $31,750 $25,985
Revolving line-of-credit agreement with interest
payable quarterly and all outstanding principal
due April 15, 1999 (interest at LIBOR (5.71875% at
December 31, 1995) plus 2.25% or lender's base
rate plus 1%)..................................... 6,942 10,765
Note payable under capital lease obligation to ven-
dor in quarterly principal and interest install-
ments of $38 through October 1, 1998. The Note
carries interest at 10.8% and is collateralized by
equipment with a net book value of $592 at Decem-
ber 31, 1995. Total future interest payments are
$93............................................... 775 614
------- -------
39,467 37,364
Less current portion............................... 3,361 4,645
------- -------
$36,106 $32,719
======= =======
</TABLE>

Annual maturities of long-term debt and the capital lease obligations
outstanding at December 31, 1995 are as follows:

<TABLE>
<CAPTION>
REVOLVING
LINE-OF- TERM NOTES CAPITAL LEASE
YEAR ENDING DECEMBER 31, CREDIT PAYABLE OBLIGATIONS TOTAL
------------------------ --------- ---------- ------------- -------
<S> <C> <C> <C> <C>
1996................................ $ -- $ 4,500 $145 $ 4,645
1997................................ -- 6,100 136 6,236
1998................................ -- 7,100 333 7,433
1999................................ 10,765 8,285 -- 19,050
-------- -------- ---- -------
$ 10,765 $ 25,985 $614 $37,364
======== ======== ==== =======
</TABLE>

Commencing March 31, 1995, the Company was required to make additional
principal payments on the term notes payable based on excess cash flow, if
any, from the preceding year. Also, the Company is required to pay at least
50% of the proceeds from any sale of capital stock or other securities (net of
any fees, commissions or expenses incurred in the sale of such securities),
which are required to be registered under the Securities Act of 1933, toward
the outstanding principal on the term notes at the time of such sale.

During 1995, the Company was required to make an additional principal
payment of $1,440 based on excess cash flow. Also, the Company was required to
make an additional principal payment of $1,125 based on the proceeds from the
disposal of the surgical drapes segment.

F-13
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)

Under the terms of the revolving line-of-credit, the Company may borrow up
to a maximum capacity of $14,000 to be used for working capital and operating
needs. The amount available to the Company at any given time is based upon
various percentages of the Company's outstanding inventories and accounts
receivable as determined periodically throughout the year (borrowing base).
Any principal amounts outstanding on the line-of-credit in excess of the
borrowing base must be repaid by the Company. In any event, all outstanding
principal on the line-of-credit is due and payable on April 15, 1999.
Management expects that the borrowing base will remain at a sufficient level
for the next 12 months such that no payment on the line-of-credit will be
required. Accordingly, the line-of-credit outstanding at December 31, 1995 is
classified as long-term. The Company pays a quarterly commitment fee equal to
0.5% per annum on the average daily unused balance on the line-of-credit
during the preceding calendar quarter from April 15, 1994 through April 15,
1999.

The Company was not in compliance with certain financial covenants of loan
agreements with banks as of December 31, 1995, March 30, 1996 and June 29,
1996 for which waivers were obtained on September 3, 1996. In conjunction with
the waivers, amendments to the interest coverage and operating cash flow ratio
covenants were also obtained for the quarter ending September 28, 1996, to
make the covenants less stringent.

Both the term notes and line-of-credit are collateralized by all assets of
the Company except for those collateralized under the capital lease
obligations. The debt agreements have restrictions regarding payment of
dividends, incurrence of additional debt and require compliance with various
financial covenants.

9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK

On April 15, 1994, the Company issued 574,471 shares of Common Stock;
426,777 shares of Non-Voting Common Stock; 340,454 shares of Series A
Convertible Preferred Stock; 2,127,838 shares of Series B Convertible
Preferred Stock; and 289,853 shares of Series C Redeemable Preferred Stock in
exchange for the outstanding stock of Merocel and the acquisition of Xomed,
except that cash equal to the redemption value of $100.00 per share was
received for 198,561 shares of the Series C Redeemable Preferred Stock.

The recapitalization of the Company as described above resulted in the
excess of the carrying value of the stock issued over the net assets received
of $3,653 being included in the retained deficit at April 15, 1994.

In August 1994, the Company repurchased 18,698 shares of its outstanding
Series C Redeemable Preferred Stock, which were originally issued at April 15,
1994, from holders of the stock. The stock was repurchased at a price of
$1,870 which represented the amount originally paid by the shareholders for
the stock. The repurchase was the result of the partial refund of the purchase
price by the seller for Xomed (see Note 1). In addition, cash dividends of
$105 were paid in August 1994 to the remaining holders of the Series C
Redeemable Preferred Stock, also from the proceeds of the partial refund of
the Xomed purchase price.

Also in August 1994, the Company issued 23,761 shares of its Series A
Convertible Preferred Stock and 1,908 shares of its Series C Redeemable
Preferred Stock to certain officers and members of management (purchasers) of
the Company. The Series A Convertible Preferred Stock was issued at $9.58 per
share (equal to its redemption value) for a total price of approximately $227.
The Series C Redeemable Preferred Stock was issued at $100.00 per share (equal
to its redemption value) for a total price of

F-14
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)

approximately $191. Of the total purchase price for all shares issued of $418,
the Company has received $69 in cash and the remaining $349 of notes
receivable have been reflected as a component of shareholders' equity in the
accompanying balance sheets (see Note 13).

During the year ended December 31, 1995, the Company issued 19,000 of Common
Stock under the employee stock incentive plan. The stock was issued at option
prices of between $1.00 to $2.00 per share and resulted in $22 of additional
paid-in capital (see Note 11).

Common Stock

Each share of Common Stock and Non-Voting Common Stock (collectively Common
Equity) entitles its holder to receive dividends as declared by the Company's
Board of Directors, subject to the preferences and other rights of the Series
A, Series B and Series C Redeemable Preferred Stock. Each share of Non-Voting
Common Stock is convertible into one share of Common Stock at the election of
the shareholder.

Subsequent to year end, the Company amended and restated its Restated
Certificate of Incorporation to, among other things, (i) change the
designation of its Class A Common Stock to "Common Stock," (ii) change the
designation of its Class B Common Stock to "Non-Voting Common Stock," (iii)
increase the number of authorized shares of Common Stock to 30,000,000 and
(iv) authorize a class of undesignated Preferred Stock, par value $0.01 per
share.

Redeemable Preferred Stock

Each share of Series A and Series B Convertible Preferred Stock
(collectively Convertible Preferred Stock) entitles its holder to receive an
annual cumulative cash dividend at the rate of six percent per annum, payable
on a quarterly basis. At the election of the Board of Directors, dividends may
be paid in shares of Series A or Series B Convertible Preferred Stock,
respectively, in lieu of cash. Dividends are cumulative and must be paid prior
to any dividends being paid on the Common Equity. The Company at its option,
with the majority consent of the holders of the Convertible Preferred Stock,
may redeem any or all of the outstanding shares of the Convertible Preferred
Stock at a price of $9.58 per share, plus accrued dividends. At December 31,
1995, dividends in arrears on the Series A and Series B Convertible Preferred
Stock were $352 ($0.97 per share) and $2,089 ($0.98 per share), respectively
(see Note 17). The Series A Convertible Preferred Stock is voting along with
the Common Equity on an as converted basis, whereas the Series B has no voting
rights.

In any event, all outstanding shares of the Convertible Preferred Stock at
April 15, 2001 are required to be redeemed on that date by the Company at
$9.58 per share, plus accrued dividends. Each share of Convertible Preferred
Stock, at the election of the holder, may be converted for one share of like
Common Equity (the conversion rate being subject to adjustment from time-to-
time). All shares of Convertible Preferred Stock will be automatically
converted into shares of Common Equity at the conversion rate in effect upon
the closing of an underwritten public offering made pursuant to an effective
registration statement under the Securities Act of 1933.

Each share of Series C Redeemable Preferred Stock (Series C Preferred Stock)
entitles its holder to receive an annual cumulative cash dividend at the rate
of nine percent per annum, payable on a quarterly basis. At the election of
the Board of Directors, dividends may be paid in shares of Series C Preferred
Stock in lieu of cash. Dividends are cumulative and must be paid prior to any
dividends being paid on the

F-15
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
9. SHAREHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)

Common Equity. The Company at its option, with the majority consent of the
holders of the Series C Preferred Stock, may redeem any or all of the
outstanding shares of the Series C Preferred Stock at a price of $100.00 per
share, plus accrued dividends. At December 31, 1995, dividends in arrears on
Series C Preferred Stock were $4,148 ($15.19 per share, see Note 17).

In any event, all outstanding shares of the Series C Preferred Stock at
April 15, 2001 are required to be redeemed on that date by the Company at
$100.00 per share, plus accrued dividends.

10. RETIREMENT BENEFITS

Retirement benefits are provided to all eligible employees through the
participation in defined contribution plans maintained by the Company which
comply with the provisions of Section 401(k) of the Internal Revenue Code (the
"Savings Plans"). The provisions of the Savings Plans differ with respect to
employee contributions, employer matching percentages and profit sharing
depending on the country in which the employees work. Expense recorded by the
Company for the various plans for the years ended December 31, 1993, 1994 and
1995 was approximately $401, $295 and $520, respectively.

11. EMPLOYEE STOCK INCENTIVES

The Company has reserved an aggregate of 415,000 shares of its Common Stock
(see Note 9) for grant or sale to key employees of the Company. These shares
may be issued in such amounts and in such a manner (including stock options,
restricted stock grants, stock bonuses, or other stock incentive programs) as
determined by the Company's Board of Directors from time-to-time. The options
are granted at exercise prices equal to the fair market value of common stock
on the date of grant. The following table summarizes option activity which may
be exercised at various dates through January 2000:

<TABLE>
<CAPTION>
1993 1994 1995
---------- ------- -------
<S> <C> <C> <C>
Options outstanding
beginning of the year.. 91,950 132,850 257,100
Options granted......... 45,900 131,000 8,000
Options exercised....... (5,000) (6,750) (6,750)
Options canceled........ -- -- (7,000)
---------- ------- -------
Options outstanding end
of year................ 132,850 257,100 251,350
========== ======= =======
Range of option prices
on options granted..... $1.00-2.00 $9.58 $9.58
========== ======= =======
</TABLE>

12. INCOME TAXES

The provision for income taxes (benefit) from continuing operations consists
of the following:

<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 30 $(292) $ 206
State................................................ 41 (47) 33
---- ----- ------
71 (339) 239
Deferred............................................... 50 (435) 1,116
---- ----- ------
$121 $(774) $1,355
==== ===== ======
</TABLE>

F-16
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
12. INCOME TAXES (CONTINUED)

Income tax expense (benefit) from continuing operations reconciled to the
amount computed at statutory rates is as follows:

<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate.............. $116 $(815) $ 588
State income taxes (benefit) (net of federal income
tax effect)......................................... 14 (78) 136
Unrecognized loss from foreign operations............ -- 45 387
Loss from unconsolidated subsidiary for tax purposes. -- 114 192
Other, net........................................... (9) (40) 52
---- ----- ------
$121 $(774) $1,355
==== ===== ======
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income taxes are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Deferred income tax assets:
Amortization of goodwill............................... $ -- $ 84
Net operating loss carryforwards....................... 872 --
Losses from foreign operations and unconsolidated
subsidiary............................................ 159 579
Severance accruals..................................... 687 275
Patents................................................ 405 358
Inventory.............................................. 350 291
AMT credit............................................. -- 161
Non-deductible accrued expenses........................ 124 778
------ ------
2,597 2,526
Valuation allowance.................................... (159) (579)
------ ------
2,438 1,947
------ ------
Deferred income tax liabilities:
Amortization of goodwill............................... (1,160) --
Depreciation........................................... (152) (339)
Deductible prepaid expenses............................ (42) (30)
------ ------
(1,354) (369)
------ ------
$1,084 $1,578
====== ======
</TABLE>

The valuation allowance at December 31, 1994 and 1995 related to recurring
losses from foreign operations and an unconsolidated subsidiary which
management believes the ultimate realization of the related tax benefits is
not more likely than not at the present time.

F-17
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

13. RELATED PARTY TRANSACTIONS

At December 31, 1994 and 1995, the Company had notes receivable from its
officers for advances made to acquire the Company's stock (see Note 9) and for
other purposes as follows:

<TABLE>
<CAPTION>
DECEMBER
31,
----------
1994 1995
---- ----
<S> <C> <C>
Total notes outstanding................................... $681 $681
Shareholders' notes receivable............................ (349) (349)
---- ----
Other notes receivable.................................... $332 $332
==== ====
</TABLE>

The notes bear interest at rates ranging from 7% to 8% and are due in annual
installments payable from the annual bonuses (if any) paid to the officers. In
any event, all remaining principal, including accrued interest thereon, is due
and payable on August 15, 1998.

The loans made to the officers to acquire the Company's stock and other
notes from officers have been reflected as shareholders' notes receivable as a
component of shareholder's equity and non-current notes receivable from
officers, respectively, in the accompanying balance sheets.

14. LEASE COMMITMENTS

The Company was committed under noncancelable operating leases with terms in
excess of one year involving certain property and equipment. Annual minimum
rental commitments under these leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996........................................................... $ 549
1997........................................................... 509
1998........................................................... 297
1999........................................................... 138
2000 and thereafter............................................ 224
------
$1,717
======
</TABLE>

15. CONTINGENCIES

The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities, including product liability claims. Management believes that any
liability that may ultimately result from the resolution of these matters will
not have a material adverse effect on the financial condition or results of
operations of the Company.

F-18
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

16. SEGMENT INFORMATION

The Company's subsidiaries operate distribution facilities in a number of
foreign countries. Currently, international subsidiaries are present in
Canada, Australia, United Kingdom, France and Germany. These subsidiaries
represent approximately 14% of 1995 total sales of the Company, with France
representing the largest portion of this with 4% of total sales. Inter-area
sales are not significant to the total sales of any one geographic area.

<TABLE>
<CAPTION>
INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC
AREAS
----------------------------------------------------------------------
1994 1995
----------------------------------- ----------------------------------
UNITED INTERNATIONAL UNITED INTERNATIONAL
STATES OPERATIONS CONSOLIDATED STATES OPERATIONS CONSOLIDATED
------- ------------- ------------ ------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales................... $40,716 $1,759 $42,475 $51,644 $ 8,221 $59,865
Income (loss) from oper-
ations................. $(2,102) $ (227) $(2,329) $ 2,801 $(1,121) $ 1,680
Identifiable assets..... $93,709 $2,011 $95,720 $87,873 $ 5,250 $93,123
</TABLE>

The Company had export sales of $12.7 million in 1994 and $9.4 million in
1995 representing 30% and 15% of total sales, respectively.

17. SUBSEQUENT EVENTS

In April 1996, the Company acquired all of the outstanding stock of TreBay
which was involved in the development of ear, nose and throat surgical
specialties. The acquisition will be accounted for under the purchase method
of accounting. Accordingly, the purchase price of approximately $6.6 million
will be allocated to the individual assets acquired and liabilities assumed
based upon their respective fair values at the date of acquisition. The
transaction resulted in cost in excess of net assets acquired of approximately
$4.4 million, of which $3.6 million was allocated to in-process research and
development and was subsequently written off. Also, as part of the acquisition
accrued cumulative preferred stock dividends of approximately $7.6 million at
March 30, 1996 were waived by the holders, and accounted for as a capital
contribution by the Company.

The executive management of TreBay replaced former management of the
Company. As a result of the above transaction and a plan by new management to
combine certain operations and provide severance benefits to terminated
employees the Company recorded restructuring charges of approximately $3.1
million related principally to termination benefits during the quarter ending
June 29, 1996.

F-19
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
18. PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)

Pro Forma Statement of Operations

The following unaudited pro forma statements of operations for the year
ended December 31, 1995 and for six months ended June 29, 1996 reflects: 1)
the statement of operations of the Company for the periods presented as if
TreBay was purchased on January 1, 1995; and 2) excludes the discontinued
operations of the Company for the year ended December 31, 1995. The pro forma
statement of operations should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.

<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 29, 1996 MARCH 30, 1996
---------------- ------------------
PRO
XOMED TREBAY ADJUSTMENTS FORMA
---------------- ------------------ ----------- -------
<S> <C> <C> <C> <C>
Sales, net.............. $32,942 $ 279 $-- $33,221
Cost of sales........... 12,690 219 -- 12,909
------- ----- ---- -------
Gross profit............ 20,252 60 -- 20,312
Operating Expenses:
Selling, general and
administrative....... 14,129 299 (209)(a) 14,219
Research and develop-
ment................. 1,669 138 (116)(a) 1,691
Amortization of intan-
gibles............... 1,168 -- -- 1,168
Write-off of acquired
research and
development.......... 3,612 -- -- 3,612
Restructuring charges. 3,093 -- -- 3,093
Total operating ex- 23,671 437 (325) 23,783
penses................. ------- ----- ---- -------
Interest expense........ (1,536) -- -- (1,536)
Other income (expense), 64 54 -- 118
net.................... ------- ----- ---- -------
Income (loss) before in-
come tax expense (bene-
fit)................... (4,891) (323) 325 (4,889)
Income tax expense (ben- (1,956) -- 1(a) (1,955)
efit).................. ------- ----- ---- -------
Net income (loss)....... $(2,935) $(323) $324 $(2,934)
======= ===== ====
Preferred stock divi- 538
dends.................. -------
Net (loss) attributable
to common shareholders. $(3,472)
-------
Pro forma net (loss) per $ (.75)
share (b).............. =======
Pro forma weighted aver-
age shares outstanding
(b).................... 4,635
=======
</TABLE>
- --------
(a) Elimination of general and administrative expenses which are duplicative
and will not be incurred subsequent to the purchase date and closing of
the TreBay facility; and calculation of income tax benefit on the TreBay
loss after adjustment.
(b) See Note 19.

F-20
<PAGE>

XOMED SURGICAL PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
18. PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
----------------
XOMED TREBAY ADJUSTMENTS PRO FORMA
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Sales, net............................ $59,865 $450 $ -- $60,315
Cost of sales......................... 23,175 528 -- 23,703
------- ------- ------ -------
Gross profit.......................... 36,690 (78) -- 36,612
Operating expenses:
Selling, general and administrative.. 27,077 1,084 (825)(a) 27,336
Research and development............. 2,405 443 (249)(a) 2,599
Amortization......................... 2,579 -- -- 2,579
------- ------- ------ -------
Total operating expenses.............. 32,061 1,527 (1,074) 32,514
------- ------- ------ -------
Interest expense...................... (3,063) -- -- (3,063)
Other income (expense), net........... 114 109 -- 223
------- ------- ------ -------
Income (loss) before income tax
expense (benefit).................... 1,680 (1,496) 1,074 1,258
Income tax expense (benefit).......... 1,355 -- (165)(a) 1,190
------- ------- ------ -------
Net income (loss)..................... $ 325 $(1,496) $1,239 $ 68
======= ======= ======
Dividends on preferred stock.......... --
-------
Net income available to common
shareholders......................... $ 68
=======
Pro forma net income per share(b)..... $ 0.01
=======
Pro forma weighted average shares
outstanding(b)....................... 4,632
=======
</TABLE>
- --------
(a) Elimination of general and administrative expenses which are duplicative
and will not be incurred subsequent to the purchase date, closing of the
TreBay facility and calculation of income tax benefit on the TreBay loss
after adjustment.
(b) See Note 19.

19. PRO FORMA AND SUPPLEMENTARY PRO FORMA NET INCOME PER SHARE

Pro forma net income per share is computed based on the weighted average
number of shares of common stock outstanding assuming conversion on January 1,
1995 of: 1) all Series A and B Convertible Preferred Stock outstanding as of
December 31, 1995; 2) 390,000 shares of Series A Convertible Preferred Stock
issued in the purchase of TreBay; 3) all stock options including the options
issued after December 31, 1995 which have been assumed to be outstanding as of
January 1, 1995; and 4) the conversion of 60,225 shares of Series C Redeemable
Preferred Stock into 314,650 shares of Common Stock on the date of the initial
public offering, based upon an assumed initial public offering price of $20.00
per share.

Supplementary pro forma net income per share is computed upon the basis
stated above and giving effect to the Company's proposed initial public
offering of 2,500,000 shares of Common Stock and paydown of approximately
$23,213,000 of term notes payable and $25,000,000 of Series C Redeemable
Preferred Stock as if the offering was effective January 1, 1995. Interest
expense, net of tax benefit, totaling $1,299,770 and $580,632 for the year
ended December 31, 1995 and six months ended June 29, 1996 has been eliminated
as a result of the assumed paydown of debt.

F-21
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Xomed, Inc.

We have audited the accompanying combined balance sheets of Xomed, Inc.
(formerly Xomed-Treace, Inc. and Xomed Treace P.R. Inc.) (the Company) as of
December 31, 1993 and April 15, 1994, and the related combined statements of
income and retained earnings and cash flows for the year ended December 31,
1993 and the three and one-half months ended April 15, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Xomed, Inc. at
December 31, 1993 and April 15, 1994, and the combined results of their
operations and their cash flows for the year ended December 31, 1993 and the
three and one-half months ended April 15, 1994 in conformity with generally
accepted accounting principles.

Ernst & Young LLP

Jacksonville, Florida
May 31, 1996

F-22
<PAGE>

XOMED, INC.

COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 417 $ 90
Accounts receivable, less allowance for doubtful
accounts
of $328--1993 and $278--1994......................... 8,005 6,438
Other receivables..................................... -- 427
Inventories........................................... 9,800 10,124
Prepaid expenses...................................... 290 220
------- -------
Total current assets.................................... 18,512 17,299
Investments............................................. 1,199 1,199
Property, plant and equipment, net...................... 9,785 10,403
Goodwill................................................ 7,711 7,413
Other assets............................................ 326 309
------- -------
Total assets............................................ $37,533 $36,623
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 2,727 $ 1,992
Accrued expenses...................................... 2,351 1,264
Due to parent......................................... 7,164 7,532
Current portion capital lease obligation.............. 267 178
------- -------
Total current liabilities............................... 12,509 10,966
Obligation under capital lease.......................... 686 715
------- -------
Total liabilities....................................... 13,195 11,681
Shareholders' equity:
Common stock, $1.00 par value; 1,000 shares
authorized,
issued and outstanding............................... 1 1
Additional paid-in capital............................ 12,579 12,579
Retained earnings..................................... 11,758 12,362
------- -------
Total shareholders' equity.............................. 24,338 24,942
------- -------
Total liabilities and shareholders' equity.............. $37,533 $36,623
======= =======
</TABLE>

See accompanying notes.

F-23
<PAGE>

XOMED, INC.

COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE AND
ONE-HALF
YEAR ENDED MONTHS ENDED
DECEMBER 31, APRIL 15,
1993 1994
------------ ------------
<S> <C> <C>
Sales, net........................................... $45,364 $12,801
Cost of sales........................................ 20,692 6,086
------- -------
Gross profit......................................... 24,672 6,715
Operating expenses:
Selling, general and administrative................. 15,065 5,371
Research and development............................ 2,766 692
Amortization of intangibles......................... 807 298
------- -------
Total operating expenses............................. 18,638 6,361
Operating income from continuing operations.......... 6,034 354
Other income, net.................................... 334 17
------- -------
Income from continuing operations before income tax
expense............................................. 6,368 371
Allocation for income tax expense.................... 2,420 141
------- -------
Income from continuing operations.................... 3,948 230
Discontinued operations:
Income from operations of discontinued surgical
drapes segment (less applicable income taxes of
$1,243 and $230 at December 31, 1993 and April 15,
1994, respectively)............................... 2,029 374
------- -------
Net income........................................... 5,977 604
Retained earnings, beginning of period............... 5,781 11,758
------- -------
Retained earnings, end of period..................... $11,758 $12,362
======= =======
</TABLE>

See accompanying notes.

F-24
<PAGE>

XOMED, INC.

COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE AND
ONE-HALF
YEAR ENDED MONTHS ENDED
DECEMBER 31, APRIL 15,
1993 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................... $ 5,977 $ 604
Adjustments to reconcile net income to cash flow
provided
by operating activities:
Depreciation and amortization...................... 1,810 642
Loss on disposal of assets......................... -- 230
(Increase) decrease in accounts and other receiv-
able, net......................................... (1,660) 1,140
Decrease (increase) in inventories, net............ 1,660 (324)
Decrease in prepaid expenses and other assets...... 152 87
Increase (decrease) in accounts payable and accrued
expenses.......................................... 1,444 (1,822)
(Decrease) increase due to parent.................. (6,360) 367
------- -------
Net cash provided by operating activities............ 3,023 924
INVESTING ACTIVITIES
Purchases of property, plant and equipment........... (2,018) (1,170)
Purchases of other assets............................ (495) --
------- -------
Net cash used in investing activities................ (2,513) (1,170)
FINANCING ACTIVITIES
Proceeds from capital lease obligation............... 90 --
Principal payments on capital lease obligation....... (267) (81)
------- -------
Net cash used in financing activities................ (177) (81)
------- -------
Increase (decrease) in cash and cash equivalents..... 333 (327)
Cash and cash equivalents, beginning of period....... 84 417
------- -------
Cash and cash equivalents, end of period............. $ 417 $ 90
======= =======
</TABLE>

See accompanying notes.

F-25
<PAGE>

XOMED, INC.

NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994

1. ORGANIZATION

Xomed-Treace, Inc. and Xomed-Treace, P.R., Inc. (collectively, Xomed, Inc.
or the Company) designs, manufactures and sells otolaryngology/head and neck
and ophthalmology surgical specialties to domestic and foreign hospitals,
medical care facilities and physicians. The Company performs ongoing credit
evaluations of its customers' financial condition and generally no collateral
is required. Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc. are wholly-owned
subsidiaries of Bristol-Myers Squibb Company ("BMS"). As of April 15, 1994,
the Company was purchased by Xomed Surgical Products, Inc. (see Note 13).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Combination

The combined financial statements of the Company include the accounts of
Xomed-Treace, Inc. and Xomed-Treace, P.R. Inc. Significant intercompany
transactions and balances between entities have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents.

Inventory Valuation

Inventories are stated at the lower of cost, as determined on the average
cost method, or market. Market for raw materials is based on replacement costs
and for other inventory classifications on net realizable value.

Investments

Property, Plant and Equipment

Income Taxes

The Company files federal consolidated tax returns with BMS. Under a tax
sharing agreement BMS allocates federal and state income tax expense to the
Company at an effective tax rate of approximately 38% and makes all income tax
payments on the Company's behalf. The balance sheet does not reflect any
current or deferred income tax assets or liabilities as such amounts will be
realized by BMS. Amounts payable or receivable from BMS related to income
taxes are included in due to parent in the 1993 and 1994 balance sheets.

F-26
<PAGE>

XOMED, INC.

NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

New Accounting Pronouncements

In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying value. Statement No. 121 also addresses the accounting for the
expected disposition of long-lived assets.

The Company will adopt Statement No. 121 and No. 123 in 1996 and, based on
current information, does not believe the effect of adoption will be material
to the financial condition or results of operations of the Company.

3. DISCONTINUED OPERATIONS

The Company was acquired by Xomed Surgical Products, Inc., the successor
company, in April 1994. During July 1995, the successor company sold the
surgical drapes segment and disclosed the effect of the transaction as
discontinued operations. The surgical drapes segment in the accompanying
financial statements has been reported as discontinued operations to be
consistent with the presentation in the successor company financial
statements.

Certain financial information related to the discontinued operations of the
surgical drapes segment is as follows:

<TABLE>
<CAPTION>
THREE AND ONE-
YEAR ENDED HALF MONTHS
DECEMBER 31, ENDED APRIL 15,
1993 1994
------------ ---------------
<S> <C> <C>
Sales........................................ $8,480 $1,915
====== ======
Pre-tax income............................... $3,272 $ 604
====== ======
Income tax expense........................... $1,243 $ 230
====== ======
Net income................................... $2,029 $ 374
====== ======
</TABLE>

F-27
<PAGE>

XOMED, INC.

NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994

4. INVENTORIES

<TABLE>
<CAPTION>
APRIL
DECEMBER 31, 15,
1993 1994
------------ -------
<S> <C> <C>
Finished goods.................................... $ 9,504 $11,438
Work in process................................... 866 714
Raw materials and packaging....................... 6,768 6,474
------- -------
17,138 18,626
Less reserves for slow-moving/obsolescence........ 7,338 8,502
------- -------
$ 9,800 $10,124
======= =======
</TABLE>

The reserve for slow-moving/obsolescence on January 1, 1993 was $6,621.
Write-offs for the periods ended December 31, 1993 and April 15, 1994 were
$343 and $242, respectively, and the provision for the reserve was $1,060 and
$1,406, respectively.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, less allowances for depreciation, is a
follows:

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Land and land improvements....................... $ 911 $ 911
Building and building improvements............... 3,988 4,065
Machinery and equipment.......................... 8,466 9,921
------- -------
13,365 14,897
Less allowances for depreciation................. 6,490 6,812
------- -------
6,875 8,085
Capital projects in process...................... 2,910 2,318
------- -------
$ 9,785 $10,403
======= =======
</TABLE>

Depreciation expense for the year ended December 31, 1993 and the three and
one-half months ended April 15, 1994 was approximately $1,014 and $343,
respectively, and is reflected in selling, general and administrative
expenses.

6. GOODWILL

Goodwill represents the excess of cost over net tangible identifiable assets
received in business acquisitions and is being amortized over periods of 10
and 40 years.

<TABLE>
<CAPTION>
APRIL
DECEMBER 31, 15,
1993 1994
------------ -------
<S> <C> <C>
Goodwill.......................................... $12,936 $12,936
Less accumulated amortization..................... 5,225 5,523
------- -------
$ 7,711 $ 7,413
======= =======
</TABLE>

F-28
<PAGE>

XOMED, INC.

NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994
7. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Payroll and related costs........................ $1,154 $ 467
Other............................................ 1,197 797
------ ------
$2,351 $1,264
====== ======
</TABLE>

8. OBLIGATION UNDER CAPITAL LEASE

The Company was obligated under a capital lease as follows:

<TABLE>
<CAPTION>
DECEMBER 31, APRIL 15,
1993 1994
------------ ---------
<S> <C> <C>
Note payable under capital lease obligation to
vendor in quarterly installments ranging from
$34 to $69 which includes interest through Oc-
tober 1, 1997, with interest payable at rates
ranging from 6% to 10.8% collateralized by
equipment with a net book value of approxi-
mately $890 at April 15, 1994................. $953 $893
Less current portion........................... 267 178
---- ----
$686 $715
==== ====
</TABLE>

Annual maturities of the capital lease obligations for the eight and one-
half month period ending December 31, 1994 and years ending 1995 through 1998
are as follows:

<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S> <C>
1994.............................................................. $138
1995.............................................................. 189
1996.............................................................. 87
1997.............................................................. 87
1998.............................................................. 392
----
$893
====
</TABLE>

9. RETIREMENT AND POSTRETIREMENT BENEFITS

Retirement benefits are provided to all eligible employees through the
Bristol-Myers Squibb Retirement Income Plan and the Bristol-Myers Squibb
Puerto Rico Retirement Income Plan (the "Pension Plans"). The Pension Plans
are noncontributory, defined benefit plans. Benefits are based primarily on
years of credited service and on participants' compensation. The Company's
employees also participate in defined contribution plans maintained by BMS
which comply with the provisions of Section 401(k) of the Internal Revenue
Code (the "Savings Plans").

F-29
<PAGE>

XOMED, INC.

NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994
9. RETIREMENT AND POSTRETIREMENT BENEFITS (CONTINUED)

The assets, projected benefit obligations and the related costs associated
with the Pension Plans of the Company are not separately identifiable. The
Company receives an allocation from BMS to record its estimated share of
pension expense. Pension expense allocated to the Company by BMS was
approximately $1,273 and $263 for the year ended December 31, 1993 and the
three and one-half months ended April 15, 1994, respectively.

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits". Statement No. 106 requires that postretirement health costs be
recorded in the financial statements as earned by employees. The Company
receives an allocation from BMS to record its estimated share of
postretirement benefit expense. The allocated expense was $303 and $89 for the
year ended December 31, 1993 and the three and one-half months ended April 15,
1994, respectively. The liability associated with the adoption of this
Statement is not separately identifiable and has not been reflected in the
accompanying financial statements.

10. RELATED PARTY TRANSACTIONS

The Company is charged for various services provided by BMS. The more
significant services include employee benefits and insurance. BMS provides
medical and life insurance benefits for certain employees and allocates the
related costs to the Company as the benefits are paid by BMS. The expense
allocated to the Company by BMS for these benefits was approximately $2,275
and $511 for the year ended December 31, 1993 and the three and one-half
months ended April 15, 1994, respectively.

The Company provides certain products to other BMS subsidiaries which sell
in international markets. Net sales to these BMS subsidiaries were $6,794 and
$782 and related cost of sales were $3,678 and $402 for the year ended
December 31, 1993 and the three and one-half months ended April 15, 1994,
respectively. No direct sales costs such as commissions and marketing were
charged to the Company by these BMS subsidiaries; therefore, no such amounts
have been recorded in the accompanying financial statements. Additionally, the
Company is not charged interest on its outstanding intercompany balances,
which amounted to $7,164 and $7,841 as of December 31, 1993 and April 15,
1994.

11. LEASE COMMITMENTS

At April 15, 1994, the Company was committed under noncancelable operating
leases with terms in excess of one year involving certain property and
equipment. Minimum rental commitments under these leases for the eight and
one-half month period ending December 31, 1994 and year ending December 31,
1995 are as follows:

<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S> <C>
1994................................................................. $229
1995................................................................. 27
----
$256
====
</TABLE>

Rental expenses for the above commitments for the year ended December 31,
1993 and the three and one-half month period ended April 15, 1994 was
approximately $421 and $158, respectively.

F-30
<PAGE>

XOMED, INC.

NOTES TO COMBINED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

APRIL 15, 1994
12. CONTINGENCIES

The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities, including product liability claims. Management believes that any
liability that ultimately results from the resolution of these matters will
not have a material adverse effect on the financial position or results of
operations of the Company.

13. SUBSEQUENT EVENT: SALE OF XOMED, INC.

On April 15, 1994, all of the outstanding stock of Xomed, Inc. was acquired
from BMS by Xomed Surgical Products, Inc. for approximately $81,000. The
acquisition was funded primarily through the issuance of preferred stock
($43,503) and proceeds from long-term debt.

F-31
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
TreBay Medical Corporation

We have audited the accompanying balance sheets of TreBay Medical
Corporation (the Company) as of December 31, 1994 and 1995, and the related
statements of operations, shareholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TreBay Medical Corporation
at December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

Ernst & Young LLP

Jacksonville, Florida
May 31, 1996

F-32
<PAGE>

TREBAY MEDICAL CORPORATION

BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------- APRIL 1, MARCH 30,
1994 1995 1995 1996
------ ------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 668 $ 297 $1,130 $ 345
Investments............................... 2,960 1,448 1,937 1,000
Accounts receivable, less allowance for
doubtful accounts of $5 and $74 at
December 31, 1994 and 1995, respectively. 38 127 28 174
Other receivables......................... 24 44 50 55
Inventories............................... 127 404 218 424
Other current assets...................... 15 34 38 37
------ ------ ------ ------
Total current assets........................ 3,832 2,354 3,401 2,035
Investments................................. 1,505 703 1,504 701
Note receivable from officer................ -- 883 -- 883
Equipment and leasehold improvements, net... 480 503 509 479
Cost in excess of net assets acquired, net.. 141 -- 140 --
Other assets................................ 65 86 62 105
------ ------ ------ ------
Total assets................................ $6,023 $4,529 $5,616 $4,203
====== ====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 133 $ 117 $ 76 $ 115
Accrued expenses.......................... 72 98 65 101
Current portion capital lease obligations. 12 13 12 13
------ ------ ------ ------
Total current liabilities................... 217 228 153 229
Long-term capital lease obligations, less
current portion............................ 45 31 42 28
Deferred rent and other..................... 10 15 10 14
------ ------ ------ ------
Total liabilities........................... 272 274 205 271
Shareholders' equity:
Common stock, $.01 par value, 1,000,000
shares authorized, 650,000 shares issued
and outstanding.......................... 7 7 7 7
Additional paid-in capital................ 6,480 6,480 6,480 6,480
Accumulated deficit....................... (736) (2,232) (1,076) (2,555)
------ ------ ------ ------
Total shareholders' equity.................. 5,751 4,255 5,411 3,932
------ ------ ------ ------
Total liabilities and shareholders' equity.. $6,023 $4,529 $5,616 $4,203
====== ====== ====== ======
</TABLE>

See accompanying notes.

F-33
<PAGE>

TREBAY MEDICAL CORPORATION

STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS ENDED
-------------- ------------------
APRIL 1, MARCH 30,
1994 1995 1995 1996
----- ------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales, net................................... $ 82 $ 450 $ 47 $ 279
Cost of sales................................ 42 528 84 219
----- ------- ----- -----
Gross profit................................. 40 (78) (37) 60
Operating expenses:
Selling, general and administrative......... 721 1,084 269 299
Research and development.................... 211 443 97 138
----- ------- ----- -----
Total operating expenses..................... 932 1,527 366 437
----- ------- ----- -----
Loss from operations......................... (892) (1,605) (403) (377)
Interest income.............................. 171 250 68 55
Other expense, net........................... (15) (141) (5) (1)
----- ------- ----- -----
Net loss..................................... $(736) $(1,496) $(340) $(323)
===== ======= ===== =====
</TABLE>

See accompanying notes.

F-34
<PAGE>

TREBAY MEDICAL CORPORATION

STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- RETAINED PAID-IN
SHARES AMOUNT DEFICIT CAPITAL TOTAL
------- ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994.......... -- $ -- $ -- $ -- $ --
Issuance of common stock............ 650,000 7 -- 6,480 6,487
Net loss ........................... -- -- (736) -- (736)
------- ----- ------- ------ -------
Balance at December 31, 1994........ 650,000 7 (736) 6,480 5,751
Net loss ........................... -- -- (1,496) -- (1,496)
------- ----- ------- ------ -------
Balance at December 31, 1995........ 650,000 7 (2,232) 6,480 4,255
Net loss ........................... -- -- (323) -- (323)
------- ----- ------- ------ -------
Balance at March 30, 1996........... 650,000 $ 7 $(2,555) $6,480 $3,932
======= ===== ======= ====== =======
</TABLE>

See accompanying notes.

F-35
<PAGE>

TREBAY MEDICAL CORPORATION

STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, THREE MONTHS ENDED
--------------- ----------------------------
1994 1995 APRIL 1, 1995 MARCH 30, 1996
------ ------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................ $ (736) $(1,496) $ (340) $(323)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization. 25 130 26 37
Write-off of costs in excess
of net assets acquired....... -- 131 -- --
Bond discount amortization.... (72) (61) (22) (2)
Increase in accounts and other
receivables, net............. (35) (109) (16) (58)
Increase in inventories....... (100) (277) (91) (20)
Increase (decrease) in
deferred rent................ 10 5 -- (1)
Increase in other assets...... (82) (923) (20) (22)
Increase (decrease) in
accounts payable and accrued
expenses..................... 163 9 (64) 1
------ ------- ------ -----
Net cash used in operating ac-
tivities....................... (827) (2,591) (527) (388)
INVESTING ACTIVITIES
Purchases of investments........ (6,142) (1,818) -- --
Purchases of property, plant and
equipment...................... (399) (142) (54) (13)
Purchase of River Medical, Inc.,
net of cash acquired........... (201) -- -- --
Proceeds from maturity of
investments.................... 1,752 4,193 1,046 452
------ ------- ------ -----
Net cash (used in) provided by
investing activities........... (4,990) 2,233 992 439
FINANCING ACTIVITIES
Proceeds from sale of common
stock.......................... 6,487 -- -- --
Principal payments on capital
lease obligations.............. (2) (13) (3) (3)
------ ------- ------ -----
Net cash provided by (used in)
financing activities........... 6,485 (13) (3) (3)
------ ------- ------ -----
Net increase (decrease) in cash
and cash equivalents........... 668 (371) 462 48
Cash and cash equivalents at
beginning of period............ -- 668 668 297
------ ------- ------ -----
Cash and cash equivalents at end
of period...................... $ 668 $ 297 $1,130 $ 345
====== ======= ====== =====
</TABLE>

See accompanying notes.

F-36
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

1. ORGANIZATION

TreBay Medical Corporation (the Company), a Delaware corporation, was formed
in December of 1993 and commenced operations in January 1994. The Company did
not report significant operating revenues in 1994 and was deemed to be a
development stage company until January 1, 1995. The Company develops and
markets microsurgical products for ear, nose and throat surgeons and
orthopaedic surgical instruments.

Basis of Presentation--Unaudited Interim Financial Statements

The accompanying unaudited financial statements as of April 1, 1995 and
March 30, 1996 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original
maturities of three months or less when purchased to be cash equivalents.

Inventory Valuation

Investments

Investments consist of U.S. Treasury and Government Agency notes. All
investments are classified as held- to-maturity and are carried at amortized
cost.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Depreciation is
computed using the straight-line method based on the estimated useful lives of
the related assets not exceeding ten years.

Income Taxes

F-37
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

New Accounting Pronouncements

The Company will adopt Statements No. 121 and No. 123 in 1996 and, based on
current information, does not believe the effect of adoption will be material
to the financial condition or results of operations of the Company.

3. INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Finished goods........................................... $ 43 $ 173
Work in process.......................................... 10 11
Raw materials and packaging.............................. 74 220
------ ------
$127 $404
====== ======
</TABLE>

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements, at cost, less allowances for
depreciation, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Equipment............................................... $ 260 $ 478
Leasehold improvements.................................. 74 131
------ ------
334 609
Allowances for depreciation............................. (21) (141)
------ ------
313 468
Capital projects in process............................. 167 35
------ ------
$ 480 $ 503
====== ======
</TABLE>

F-38
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS (CONTINUED)

Depreciation expense, including expense on assets under capital lease
obligations, was approximately $21 and $120 for the years ended December 31,
1994 and 1995, respectively.

5. COST IN EXCESS OF NET ASSETS ACQUIRED

In June 1994, the Company acquired River Medical, Inc. in an acquisition
accounted for as a purchase for $204. Assets acquired included accounts
receivable, inventory and equipment and liabilities assumed consisted of
accounts payable. Costs in excess of net assets acquired amounted to
approximately $145, which was being amortized over 15 years. In December 1995,
management determined that the business acquired from River Medical, Inc. had
no significant continuing value. As a result, the remaining cost in excess of
net assets acquired of $131 was written off.

6. INVESTMENTS

The following is a summary of investments, all of which are U.S. Treasury
and Government Agency notes to be held-to-maturity:

<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE LOSS
--------- ------ ----------
<S> <C> <C> <C>
Due within one year........................... $2,960 $2,939 $21
Due in one to three years..................... 1,505 1,464 41
<CAPTION>
DECEMBER 31, 1995
---------------------------
AMORTIZED FAIR UNREALIZED
COST VALUE GAIN
--------- ------ ----------
<S> <C> <C> <C>
Due within one year........................... $1,448 $1,450 $2
Due in one to three years..................... 703 709 6
</TABLE>

Fair value is determined by quoted market price.

7. CAPITAL LEASE OBLIGATIONS

The Company leases certain equipment under agreements classified as capital
leases. These leases have terms ranging from three to five years.

Annual maturities under capital lease obligations outstanding at December
31, 1995 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996.............................................................. $13
1997.............................................................. 12
1998.............................................................. 12
1999.............................................................. 7
---
$44
===
</TABLE>

F-39
<PAGE>

TREBAY MEDICAL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31, 1995

8. EMPLOYEE STOCK OPTION PLANS
The Company has granted options to key employees to acquire 68,609 shares of
common stock at $10 a share, which was the estimated fair market value of the
stock at the date of grant. In addition, the Company has reserved 3,613 options
to be granted at a later date. As a result of the acquisition of the Company by
Xomed Surgical Products, Inc. on April 16, 1996 (See Note 13), 43,332 of the
options became immediately exercisable. The remaining 25,277 options granted
become exercisable at 25% a year from December 1995 through December 1998.

9. RELATED PARTY TRANSACTION

At December 31, 1995, the Company had a note receivable from an officer in
the amount of $883 which is due on demand. The note bears interest at 10%
compounded annually and is secured by 88,333 shares of stock of the Company.

10. INCOME TAXES

At December 31, 1995, the Company had accumulated net operating losses for
financial reporting and tax purposes of approximately $2.2 million and $1.6
million, respectively, to be carried forward to future periods. These
carryforwards expire for tax purposes beginning in 2009. Due to a history of
net operating losses, the Company's management has concluded that it is more
likely than not that the tax benefit of the carryforward will not be realized
and has established a valuation allowance to offset the deferred tax asset
related to the net operating loss carryforward for 1994 and 1995.

11. LINE OF CREDIT AGREEMENT

The Company has a $150 line of credit payable on demand. The line of credit
bears interest at prime, payable monthly and is secured by $225 of the
Company's investments. There was no balance outstanding at year end.

12. LEASE COMMITMENTS

The Company was committed under a noncancelable operating lease with a term
in excess of one year related to the building it occupies. Annual minimum lease
commitments under the lease are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996............................................................. $ 56
1997............................................................. 57
1998............................................................. 59
1999............................................................. 30
----
$202
====
</TABLE>

The Company's rental expense was $40 and $68 for the years ending 1994 and
1995, respectively.

13. SUBSEQUENT EVENTS

In April 1996, the Company was acquired by Xomed Surgical Products, Inc. in
an acquisition accounted for under the purchase method of accounting. The
purchase price was approximately $6.6 million.

F-40
<PAGE>

[COLOR PICTURE OF WORLD MAP WITH NOTATIONS INDICATING LOCATIONS OF THE
COMPANY'S DIRECT OPERATIONS AND DISTRIBUTORS WITH CAPTION WHICH READS "XOMED IS
THE ONLY MAJOR MANUFACTURER AND MARKETER OF ENT SURGICAL PRODUCTS WITH A DIRECT
U.S. SALES FORCE EXCLUSIVELY SERVING ENT SPECIALISTS. THE COMPANY DISTRIBUTES
ITS PRODUCTS WORLDWIDE THROUGH A 62-PERSON DIRECT SALES FORCE IN THE U.S. AND IN
SELECTED OTHER COUNTRIES, AS WELL AS THROUGH A NETWORK OF 121 INDEPENDENT
DISTRIBUTORS."]

[COLOR PICTURES OF NEW COMPANY PRODUCTS WITH CAPTION WHICH READS
"THROUGH FOCUSED INTERNAL RESEARCH AND DEVELOPMENT, XOMED'S STRATEGY IS TO
CONTINUE ITS EMPHASIS ON PRODUCT INNOVATION."]

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CON- NECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA-TION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-TATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UN-DERWRITER.
THIS PROSPECTUS DOES NOT CONSTI-TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN- DER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE-QUENT TO THE DATE HEREOF.

------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Consolidated Financial Data...................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 31
Management................................................................ 47
Certain Transactions...................................................... 55
Principal Stockholders.................................................... 56
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 64
Underwriting.............................................................. 66
Legal Matters............................................................. 67
Experts................................................................... 67
Additional Information.................................................... 67
Index to Financial Statements............................................. F-1
</TABLE>

------------

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECT- ING TRANSACTIONS IN THE COMMON STOCK OF-FERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

2,500,000 Shares

[LOGO]

XOMED SURGICAL PRODUCTS, INC.

Common Stock

-------------

PROSPECTUS

-------------

Alex. Brown & Sons
INCORPORATED

UBS Securities

, 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered which will be paid
solely by the Company. All the amounts shown are estimates, except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee:

<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
SEC registration fee............................................. $20,819
NASD filing fee.................................................. 6,538
Nasdaq listing fee............................................... 34,699
Transfer agent and registrar fees and expenses................... *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Miscellaneous expenses .......................................... *
-------
Total.......................................................... $ *
=======
</TABLE>

- --------
* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Restated Certificate of Incorporation (the "Restated
Certificate") provides that the Company shall indemnify each person who is or
was a director, officer or employee of the Company to the fullest extent
permitted under Section 145 of the Delaware General Corporation Law. Section
145 of the Delaware General Corporation Law empowers a Delaware corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of such corporation) by reason of the fact that such person is or
was a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer or director in defending
such action, provided that the director or officer undertakes to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.

A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses (including attorneys' fees) which he
actually and reasonably incurred in connection therewith. The indemnification
provided is not deemed to be exclusive of any other rights to which an officer
or director may be entitled under any corporation's bylaw, agreement, vote or
otherwise.

II-1
<PAGE>

The Restated Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, which concerns unlawful payments of
dividends, stock purchases or redemption, or (iv) for any transaction from
which the director derived an improper personal benefit.

While the Restated Certificate provides directors with protection from
awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the Restated Certificate will have no effect
on the availability of equitable remedies such as an injunction or rescission
based on a director's breach of his or her duty of care. The provisions of the
Restated Certificate described above apply to an officer of the Company only
if he or she is a director of the Company and is acting in his or her capacity
as director, and do not apply to officers of the Company who are not
directors.

Reference is made to the Underwriting Agreement (Exhibit 1) which provides
for indemnification of the Company, its directors, officers and controlling
persons.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information is furnished with regard to all securities sold by
the Company within the past three years which were not registered under the
Securities Act.

On April 15, 1994, in connection with the Xomed Acquisition, the Company:

1. Issued an aggregate of 573,120 shares of Common Stock, 426,777 shares of
Non-Voting Common Stock and 91,292 shares of Series C Redeemable
Preferred Stock to the stockholders of Merocel in exchange for an
aggregate consideration of 291,730 shares of Merocel Common Stock,
68,900 shares of Merocel Series A Preferred Stock and 8,498 shares of
Merocel Series B Preferred Stock;

2. Issued an aggregate of 340,454 shares of Series A Convertible Preferred
Stock to certain institutional investors for an aggregate consideration
of $3,261,549.32;

3. Issued 2,127,838 shares of Series B Convertible Preferred Stock to WP
Investors for an aggregate consideration of $20,384,688.04; and

4. Issued an aggregate of 198,561 shares of Series C Redeemable Preferred
Stock to certain institutional investors for an aggregate consideration
of $19,856,100.

On August 15, 1994, the Company issued 9,563 shares of Series A Convertible
Preferred Stock to Mark K. Adams for an aggregate consideration of $91,613.54
in connection with the concurrent execution of an Employment Agreement and
Loan and Pledge Agreement with Mr. Adams.

On August 15, 1994, the Company issued 768 shares of Series C Redeemable
Preferred Stock to Mark K. Adams for an aggregate consideration of $76,800 in
connection with the concurrent execution of an employment agreement and loan
and pledge agreement with Mr. Adams.

On August 15, 1994, the Company issued 5,679 shares of Series A Convertible
Preferred Stock to David R. Grant for an aggregate consideration of $54,404.82
in connection with the concurrent execution of a Loan, Stock Purchase and
Pledge agreement with Mr. Grant.

On August 15, 1994, the Company issued 456 shares of Series C Redeemable
Preferred Stock to David R. Grant for an aggregate consideration of $45,600 in
connection with the concurrent execution of a Loan, Stock Purchase and Pledge
agreement with Mr. Grant.

On August 15, 1994, the Company issued 5,679 shares of Series A Convertible
Preferred Stock to Thomas J. Drury for an aggregate consideration of
$54,404.82 in connection with the concurrent execution of a Loan, Stock
Purchase and Pledge agreement with Mr. Drury.

II-2
<PAGE>

On August 15, 1994, the Company issued 456 shares of Series C Redeemable
Preferred Stock to Thomas J. Drury for an aggregate consideration of $45,600
in connection with the concurrent execution of a Loan, Stock Purchase and
Pledge agreement with Mr. Grant.

On August 15, 1994, the Company issued 2,840 shares of Series A Convertible
Preferred Stock to Arthur A. Gertzman for an aggregate consideration of
$27,207.20 in connection with the concurrent execution of a Loan, Stock
Purchase and Pledge agreement with Mr. Gertzman.

On August 15, 1994, the Company issued 228 shares of Series C Redeemable
Preferred Stock to Arthur A. Gertzman for an aggregate consideration of
$22,800 in connection with the concurrent execution of a Loan, Stock Purchase
and Pledge agreement with Mr. Gertzman.

On April 15, 1996, in connection with the Company's acquisition of TreBay,
the Company:

1. Issued an aggregate of 390,000 shares of Series A Convertible Preferred
Stock and 28,470 shares of Series C Redeemable Preferred Stock to
certain stockholders of TreBay for an aggregate consideration of 650,000
shares of TreBay Common Stock; and

2. Issued stock options (outside of the Stock Option Plan) to purchase an
aggregate of 41,166 shares of Common Stock for an aggregate exercise
price of $385,313.76 to certain optionholders of TreBay for an aggregate
consideration of stock options to purchase an aggregate of 68,609 shares
of TreBay Common Stock.

The sales described in this Item 15 were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering. The foregoing
transactions did not involve a distribution or public offering. No
underwriters were engaged in connection with the foregoing issuances of
securities and no commissions or discounts were paid.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1 Form of Underwriting Agreement
+3.1.1 Restated Certificate of Incorporation
3.1.2 Second Restated Certificate of Incorporation
+3.2.1 By-Laws
3.2.2 Restated By-Laws
*4 Specimen of Registrant's Common Stock certificate
*5 Opinion of Willkie Farr & Gallagher as to the Legality of the
Common Stock
+10.1 Stockholders Agreement, dated as of April 16, 1996, among the
Company, Warburg, Pincus Investors, L.P., Accel IV L.P., Accel
Investors '94 L.P., Accel Keiretsu L.P., Elmore C. Patterson
Partners, Prosper Partners, Vertical Fund Associates, L.P.,
Vertical Medical Partners, L.P., Vertical Partners, L.P., Mark K.
Adams, Solomon Rosenblatt, Ronald J. Cercone, William R. Miller,
Robert A. Reeves, First Union Capital Partners, Inc., James T.
Treace, John R. Treace, Daniel H. Treace and F. Barry Bays.
+10.2 Credit Agreement, dated as of April 15, 1994, by and among
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, certain
other lenders which are or may become parties and Bank of Boston
Connecticut, as Agent.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
<C> <S>
+10.3 Fourth Amendment and Waiver Agreement, dated as of June 7, 1996, by and
among Xomed Surgical Products, Inc., formerly known as Merocel/Xomed
Holdings, Inc., Merocel Corporation, Xomed, Inc., formerly known as
Xomed-Treace, Inc., Xomed-Treace, P.R. Inc., TreBay Medical
Corporation, Bank of Boston Connecticut, Chemical Bank, Bank of
Scotland, Internationale Nederlanden (U.S.) Capital Corporation and
Bank of Boston Connecticut, as Agent.
+10.4 Third Amendment and Waiver Agreement, dated as of April 15, 1996, by
and among Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed, Inc.,
formerly known as Xomed-Treace, Inc., Xomed-Treace, P.R. Inc., Bank of
Boston Connecticut, Chemical Bank, Bank of Scotland, Internationale
Nederlanden (U.S.) Capital Corporation and Bank of Boston Connecticut,
as Agent.
+10.5 Second Amendment and Waiver Agreement, dated as of July 3, 1995, by and
among Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical
Bank, Bank of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
+10.6 Amendment and Waiver Agreement, dated as of March 31, 1995, by and
among Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace,
Inc., Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical
Bank, Bank of Scotland, Internationale Nederlanden (U.S.) Capital
Corporation and Bank of Boston Connecticut, as Agent.
+10.7 First Amendment Agreement, dated as of June 24, 1994, by and among
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed-Treace, Inc.,
Xomed-Treace, P.R. Inc., Bank of Boston Connecticut, Chemical Bank,
Bank of Scotland, Internationale Nederlanden (U.S.) Capital Corporation
and Bank of Boston Connecticut, as Agent.
+10.8 1996 Stock Option Plan
+10.9 Employment Agreement, dated as of April 16, 1996, between the Company
and James T. Treace.
+10.10 Employment Agreement, dated as of April 16, 1996, between the Company
and F. Barry Bays.
10.11 Fifth Amendment and Waiver Agreement, dated as of September 3, 1996, by
and among Xomed Surgical Products, Inc., formerly known as
Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed, Inc.,
formerly known as Xomed-Treace, Inc., Xomed-Treace, P.R. Inc., TreBay
Medical Corporation, Bank of Boston Connecticut, The Chase Manhattan
Bank (formerly known as Chemical Bank), Bank of Scotland,
Internationale Nederlanden (U.S.) Capital Corporation and Bank of
Boston Connecticut, as Agent.
10.12 Separation Agreement, dated as of May 10, 1996, between the Company and
Mark K. Adams.
+21 Subsidiaries
*23.1 Consent of Willkie Farr & Gallagher (included in their opinion filed as
Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+24 Power of Attorney
+27 Financial Data Schedule
</TABLE>

- --------
* To be filed by amendment.

+ Previously filed.

(b) Financial Statement Schedules

None.

ITEM 17. UNDERTAKINGS

(1) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

II-4
<PAGE>

(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to its Restated Certificate, Bylaws, the Underwriting
Agreement or otherwise, the Registrant has been advised that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

(3) The Registrant hereby undertakes that:

(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

II-5
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN JACKSONVILLE, FLORIDA ON SEPTEMBER 13, 1996.

Xomed Surgical Products, Inc.

By: /s/ Thomas E. Timbie
----------------------------------

Name: Thomas E. Timbie

Title: Vice President, Finance
and Chief Financial Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.

SIGNATURES TITLE DATE

President, Chief
* Executive Officer September 13,
- ------------------------------------- and Chairman of the 1996
JAMES T. TREACE Board of Directors
(Principal
Executive Officer)

Vice President,
/s/ THOMAS E. TIMBIE Finance and Chief September 13,
- ------------------------------------- Financial Officer 1996
THOMAS E. TIMBIE (Principal
Financial and
Accounting Officer)

Director
* September 13,
- ------------------------------------- 1996
RICHARD B. EMMITT

Director
* September 13,
- ------------------------------------- 1996
PAUL H. KLINGENSTEIN

Director
* September 13,
- ------------------------------------- 1996
WILLIAM R. MILLER

Director
* September 13,
- ------------------------------------- 1996
RODMAN W. MOORHEAD, III

II-6
<PAGE>

SIGNATURES TITLE DATE

Director
* September 13,
- ------------------------------------- 1996
JAMES E. THOMAS

Director
* September 13,
- ------------------------------------- 1996
ELIZABETH H. WEATHERMAN

Thomas E. Timbie, by signing his name below, signs this document on behalf
of each of the above-named persons specified by an asterisk (*), pursuant to
powers of attorney duly executed by such persons, filed with the Securities
and Exchange Commission in the Registrant's Registration Statement on August
20, 1996.

/s/ THOMAS E. TIMBIE
- ------------------------------------- Attorney-in-fact
THOMAS E. TIMBIE

II-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1.2 Second Restated Certificate of Incorporation
3.2.2 Restated By-Laws
10.11 Fifth Amendment and Waiver Agreement, dated as of September 3,
1996, by and among Xomed Surgical Products, Inc., formerly known
as Merocel/Xomed Holdings, Inc., Merocel Corporation, Xomed, Inc.,
formerly known as Xomed-Treace, Inc., Xomed-Treace, P.R. Inc.,
TreBay Medical Corporation, Bank of Boston Connecticut, The Chase
Manhattan Bank (formerly known as Chemical Bank), Bank of
Scotland, Internationale Nederlanden (U.S.) Capital Corporation
and Bank of Boston Connecticut, as Agent.
10.12 Separation Agreement, dated as of May 10, 1996, between the
Company and Mark K. Adams.
23.2 Consent of Ernst & Young LLP
</TABLE>

<PAGE>

EXHIBIT 3.1.2

SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
XOMED SURGICAL PRODUCTS, INC.

* * * * *

XOMED SURGICAL PRODUCTS, INC., a Delaware corporation, hereby
certifies as follows:

1. The name of the corporation is Xomed Surgical Products, Inc.
Xomed Surgical Products, Inc. was originally incorporated under the name of
Merocel/Xomed Holdings, Inc., and the original Certificate of Incorporation of
the corporation was filed with the Secretary of State of the State of Delaware
on April 5, 1994.

2. The original Certificate of Incorporation was amended and restated
pursuant to a Restated Certificate of Incorporation which was filed with the
Secretary of State of the State of Delaware on April 14, 1994, which was further
amended pursuant to (i) a Certificate of Amendment to the Restated Certificate
of Incorporation which was filed with the Secretary of State of the State of
Delaware on June 9, 1995 and (ii) a Certificate of Amendment to the Restated
Certificate of Incorporation which was filed with the Secretary of State of the
State of Delaware on April 15, 1996

3. Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Restated Certificate of Incorporation further
amends, restates and integrates the provisions of the Restated Certificate of
Incorporation of this corporation.

4. This Restated Certificate of Incorporation was duly adopted by the
written consent of the Board of Directors of the corporation and by the written
consent of the stockholders of the corporation in accordance with the applicable
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware.

5. The text of the Restated Certificate of Incorporation of the
corporation is hereby further amended and restated to read in its entirety as
follows:

ARTICLE I
The name of the corporation is:

XOMED SURGICAL PRODUCTS, INC. (the "Corporation").
<PAGE>

ARTICLE II

The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at such address is The Corporation Trust Company.

ARTICLE III

The nature of the business to be conducted or promoted by and the purposes
of the Corporation are as follows:

(a) To acquire, own and hold the capital stock of Merocel Corporation, Xomed,
Inc. (formerly known as "Xomed-Treace, Inc.") and Xomed-Treace, P.R. Inc. and
such other subsidiaries as the Board of Directors of the Corporation may from
time to time designate; and

(b) To engage in any other lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.

In furtherance of such business and purposes, the Corporation shall possess
and exercise all the powers and privileges granted by the General Corporation
Law of the State of Delaware or by any other law of the State of Delaware or by
this certificate of incorporation together with any powers incidental thereto,
so far as such powers and privileges are necessary or convenient to the conduct,
promotion or attainment of the business or purposes of the Corporation.

ARTICLE IV

The total authorized capital stock of the Corporation shall be Forty
Million Three Hundred Thousand (40,300,000) shares consisting of: (i) Thirty
Million (30,000,000) shares of Common Stock of the par value of One Cent ($0.01)
per share (the "Common Stock"); (ii) Four Million (4,000,000) shares consisting
of Non-Voting Common Stock of the par value of One Cent ($0.01) per share (the
"Non-Voting Common Stock"); (iii) One Million Two Hundred Thousand (1,200,000)
shares of Series A Convertible Preferred Stock of the par value of One Dollar
($1.00) per share (the "Series A Preferred Stock"); (iv) Three Million Five
Hundred Thousand (3,500,000) shares of Series B Convertible Preferred Stock of
the par value of One Dollar ($1.00) per share (the "Series B Preferred Stock");
(v) Six Hundred Thousand (600,000) shares of Series C Redeemable Preferred Stock
of the par value of One Dollar ($1.00) per share (the "Series C Preferred
Stock"); and (vi) One Million (1,000,000) shares of undesignated Preferred Stock
of the par value of One Cent ($0.01) per share (the "Undesignated Preferred
Stock"). The Common Stock and the Non-

2
<PAGE>

Voting Common Stock are collectively referred to herein as the "Common Equity,"
and the Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred stock are collectively referred to herein as the "Preferred Stock."

The relative powers, preferences and rights of, and the qualifications,
limitations and restrictions granted to and imposed upon, the Preferred Stock
and the Common Equity, and the provisions for the Undesignated Preferred Stock,
are as follows:

SECTION A: PREFERRED STOCK

(I) General Provisions.
------------------

The following provisions shall be applicable to all shares of Preferred
Stock regardless of series designation:

(a) Preference. So long as any shares of any series of the Preferred
----------
Stock remains outstanding, in no event shall any dividend whatsoever, whether in
cash or other property (other than shares of Common Equity), be paid or declared
or any distribution be made on the Common Equity, nor shall any shares of the
Common Equity be purchased, retired or otherwise acquired for a consideration by
the Corporation (except shares of Common Equity repurchased through the
operation of vesting provisions of employee incentive programs or agreements
adopted by the Board of Directors) (i) unless the full dividends of the
Preferred Stock for all past dividend periods from the date on which they became
cumulative shall have been paid or declared and a sum set apart sufficient for
the payment thereof; and (ii) unless, if at any time the Corporation is
obligated to retire or return shares of the Preferred Stock, all arrears, if
any, in respect of the retirement of the Preferred Stock shall have been made
good. Subject to the foregoing provisions and not otherwise, such dividends
(payable in cash, stock or otherwise) as may be determined by the Board of
Directors may be declared and paid on the Common Equity from time to time out of
the remaining funds of the Corporation legally available therefor, and the
Series A Preferred Stock and Series B Preferred Stock shall be entitled to
participate in any such dividend, whether payable in cash, stock or otherwise.
The amount of any dividend per share declared on the Series A Preferred Stock or
Series B Preferred Stock shall be an amount equal to the product of (i) the same
amount as is declared as a dividend by the Board of Directors on each share of
Common Equity and (ii) the number of shares of Common Stock or Non-Voting Common
Stock, as the case may be, into which the Series A Preferred Stock and Series B
Preferred Stock is then convertible pursuant to Section II(f) hereof.

(b) Redemption Procedure. In case of redemption of only part of the shares
--------------------
of any series of Preferred Stock at any time outstanding, the Corporation shall
redeem the shares pro rata among all of the holders of such series of Preferred
Stock (as

3
<PAGE>

closely pro rata as reasonably practical without the creation of fractional
share interests).

Notice of every redemption provided for in this Section A of Article
IV shall be given by mailing the same to every holder of record, any of whose
shares are then to be redeemed, not less than fifteen (15) nor more than thirty
(30) days prior to the date fixed as the date of the redemption thereof, at the
respective addresses of such holders as the same shall appear on the stock
transfer books of the Corporation. The notice shall state that the shares
specified in such notice will be redeemed by the Corporation at the redemption
price and on the date specified in such notice, upon the surrender for
cancellation at the places designated in such notice, of the certificates
representing the shares so to be redeemed, properly endorsed in blank for
transfer, or accompanied by proper instruments of assignment and transfer in
blank, bearing any necessary transfer tax stamps thereto affixed and cancelled,
or accompanied by cash or a certified check in the amount of any stock transfer
tax applicable to such transaction. On and after the date specified in the
notice described above, each holder of shares called for redemption, upon
presentation and surrender in accordance with such notice of the certificates
for shares held by such holder and called for redemption, shall be entitled to
receive therefor the applicable redemption price. If the Corporation shall give
notice of redemption as aforesaid (and unless the Corporation shall fail to pay
the redemption price of shares presented for redemption in accordance with such
notice), all shares called for redemption shall be deemed to have been redeemed
on the date specified in such notice whether or not the certificates for such
shares be surrendered for redemption and cancellation, and such shares so called
for redemption shall from and after such date cease to represent any interest
whatever in the Corporation or its property, and the holders thereof shall have
no rights other than the right to receive such redemption price but without any
interest thereon from or after such date.

(c) Cancellation of Redeemed Shares. All shares of the Preferred
-------------------------------
Stock purchased or redeemed by the Corporation shall be forthwith retired and
cancelled and shall not be reissued, nor shall any other stock be issued in
place thereof, but the Corporation may, nevertheless, from time to time
thereafter increase its capital stock in the manner and to the extent permitted
by law and by the Certificate of Incorporation of the Corporation.

(d) Rights on Liquidation. In the event of any liquidation,
---------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock then outstanding shall be entitled to receive,
respectively, prior and in preference to any distribution of any of the assets
of the Corporation to the holders of the Common Equity by reason of their
ownership thereof, full payment of any

4
<PAGE>

dividends declared and unpaid on the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, and an amount equal to $9.58 per
share for each outstanding share of Series A Preferred Stock and Series B
Preferred Stock and $100.00 per share for each outstanding share of Series C
Preferred Stock. If upon the occurrence of such event the assets thus
distributed among the holders of the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock shall be insufficient to permit
the payment to such holders of the full preferential amount, the entire assets
of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock in proportion to the respective
amounts which would otherwise be payable in respect to the shares held by them
upon said distribution if all amounts payable on or with respect to said shares
were paid in full. After the payment or distribution to the holders of the
Series A Preferred Stock, the Series B Preferred Stock and the Series C
Preferred Stock of the full preferential amounts aforesaid, the holders of the
Common Equity then outstanding shall be entitled to receive ratably all
remaining assets of the Corporation to be distributed.

(e) Consents. (1) Except as otherwise provided below, so long as any
--------
shares of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock are outstanding, the Corporation shall not, without the
affirmative vote or written consent of the holders of record of two-thirds of
the shares of each series of Preferred Stock then outstanding, voting or
consenting, as the case may be, separately as a class, alter or change any of
the provisions of the Certificate of Incorporation of the Corporation which
would in any way adversely affect the rights of the holders of such series of
Preferred Stock.

(2) Except as otherwise provided below, so long as any shares of
Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock
are outstanding, the Corporation shall not, without the affirmative vote or
written consent of (x) the holders of record of a majority of the shares of the
Series A Preferred Stock and Series B Preferred Stock, voting or consenting, as
the case may be, together as a single class, and (y) the holders of record of a
majority of the shares of the Series C Preferred Stock:

(i) authorize or reclassify any other class or series of capital
stock ranking prior to or on a parity with the Preferred Stock as to
dividends or redemption or upon liquidation, dissolution or winding up;

(ii) increase the authorized number of shares of Preferred Stock or
authorize the reissuance thereof after repurchase or redemption;

5
<PAGE>

(iii) authorize any liquidation, dissolution, winding up of the
affairs of the Corporation, consolidation or merger of the Corporation into
or with another corporation or corporations;

(iv) authorize the sale of twenty percent (20%) of the Corporation's
assets or distribution of such amount of the Corporation's assets by way of
return of capital; or

(v) authorize the acquisition of a business through purchase of
assets, purchase of stock, licensing arrangement or otherwise which would
constitute a "significant subsidiary" under Rule 305 of Regulation S-X
promulgated under the Securities Act of 1933, as amended, at the 20% level.

(II) Series A Preferred Stock and
Series B Preferred Stock.
----------------------------

The relative powers, preferences and rights of, and the
qualifications, limitations and restrictions granted to and imposed upon, the
Series A Preferred Stock and the Series B Preferred Stock (collectively, the
"Convertible Preferred Stock") are as follows:

(a) Designation. The Series A Preferred Stock shall consist of
-----------
1,200,000 shares and shall be known as the Series A Convertible Preferred Stock,
and the Series B Preferred Stock shall consist of 3,500,000 shares and shall be
known as the Series B Convertible Preferred Stock.

(b) Dividends. (1) The holders of each share of Series A Preferred
---------
Stock and Series B Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any funds legally available therefor,
dividends in cash at the rate of six percent (6%) per annum, payable quarterly
on the last day of March, June, September and December, commencing June 30,
1994. At the option of the Corporation, dividends on the Series A Preferred
Stock and Series B Preferred Stock may be paid, instead of in cash, on
declaration of the Board of Directors, in additional shares of Series A
Preferred Stock and Series B Preferred Stock, respectively. If a dividend is to
be paid in additional shares, the number of shares of Series A Preferred Stock
and Series B Preferred Stock to be issued in payment of the dividend with
respect to each outstanding share of Series A Preferred Stock and Series B
Preferred Stock shall be determined by dividing the amount of the dividend that
would have been payable had such dividend been paid in cash by $9.58. To the
extent that all or any part of dividends consisting of additional shares of
Series A Preferred Stock or Series B Preferred Stock would result in the
issuance of a fractional share of Series A Preferred Stock or Series B Preferred
Stock (which shall be determined with respect to the aggregate number of shares
of Series A Preferred Stock or Series

6
<PAGE>

B Preferred Stock held of record by each holder) then the amount of such
fraction multiplied by $9.58 shall be paid in cash (unless there are not legally
available funds with which to make such cash payment, in which event a
fractional share will be issued).

(2) Dividends on the Convertible Preferred Stock shall be paid before
any dividends may be set apart for or paid upon the Common Equity or any other
capital stock ranking on liquidation junior to the Preferred Stock (such stock
being referred to hereinafter collectively as "Junior Stock") in any year. All
dividends declared upon the Convertible Preferred Stock shall be declared pro
rata per share.

(3) Dividends on the Convertible Preferred Stock shall accrue from
April 16, 1996 (and as of such date there exists no accrued and unpaid
dividends) and shall be cumulative, whether or not in any fiscal year there
shall be net profits or surplus available for the payment of dividends in such
fiscal year, so that if in any fiscal year or years, dividends in whole or in
part are not paid upon the Convertible Preferred Stock, unpaid dividends shall
accumulate as against the holders of the Junior Stock.

(4) For so long as shares of the Convertible Preferred Stock remain
outstanding, the Corporation shall not pay any dividend upon the Junior Stock,
whether in cash or other property (other than shares of Junior Stock), or
purchase, redeem or otherwise acquire any such Junior Stock unless, in addition
to the payment of the dividend to the holders of the Convertible Preferred Stock
as described above, the Corporation has redeemed all shares of Convertible
Preferred Stock which it would theretofore have been required to redeem under
Section (II)(c) hereof.

(c) Mandatory Redemption. The Corporation shall redeem on April 15, 2001
--------------------
(the "Redemption Date") all outstanding shares of Convertible Preferred Stock
(to the extent that such redemption shall not violate any applicable provisions
of the laws of the State of Delaware) at a price of Nine Dollars and Fifty Eight
Cents ($9.58) per share, plus an amount equal to any and all dividends accrued
and unpaid, but without interest (the "Convertible Redemption Price"). If the
Corporation is unable on the Redemption Date to redeem any shares of Convertible
Preferred Stock then to be redeemed because such redemption would violate the
applicable laws of the State of Delaware, then the Corporation shall redeem such
shares as soon thereafter as redemption would not violate such laws.

(d) Optional Redemption. The Corporation shall have the right at its
-------------------
option, and with the affirmative vote or written consent of the holders of
record of a majority of the Convertible Preferred Stock then outstanding to
redeem as a whole, or from

7
<PAGE>

time to time in part, shares of Convertible Preferred Stock at the Convertible
Redemption Price.

(e) Voting Rights. (1) Series A Preferred Stock. Each issued and
------------- ------------------------
outstanding share of Series A Preferred Stock shall be entitled to the number of
votes equal to the number of shares of Common Stock into which each such share
of Series A Preferred Stock is convertible (as adjusted from time to time
pursuant to Section A(II)(g) hereof), at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action or consideration. Subject to the provision for
adjustment hereinafter set forth, each share of Series A Preferred Stock shall
entitle the holder thereof to one (1) vote on all matters submitted to a vote of
the stockholders of the Corporation. Except as otherwise provided herein or by
law, the holders of shares of Series A Preferred Stock shall vote together with
the holders of Common Stock as a single class.

(2) Series B Preferred Stock. Except as otherwise provided by law,
------------------------
the holders of Series B Preferred Stock shall not be entitled to notice of, or
to vote at, any meeting of the stockholders of the Corporation nor to vote on
any matter relating to the business or affairs of the Corporation.

(f) Conversion. The holders of Convertible Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):

(1) Optional Conversion. Each share of Series A Preferred Stock and
-------------------
each share of Series B Preferred Stock may be converted at any time, at the
option of the holder thereof, in the manner hereinafter provided, into fully-
paid and nonassessable shares of Common Stock and Non-Voting Common Stock,
respectively, at its then effective Conversion Price (as defined below),

provided, however, that on any redemption of any Convertible Preferred Stock or
- -------- -------
any liquidation of the Corporation, the right of conversion shall terminate at
the close of business on the business day preceding the date fixed for such
redemption or for the payment of any amounts distributable on liquidation to the
holders of Convertible Preferred Stock.

(2) Mandatory Conversion. (i) Qualified Public Offering. Each share
-------------------- -------------------------
of Series A Preferred Stock and each share of Series B Preferred Stock shall
automatically be converted into shares of Common Stock and Non-Voting Common
Stock, respectively, at its then effective Conversion Price at any time upon the
closing of an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of the Corporation to the public generally
in which the market valuation (determined by multiplying the initial price to
the public upon the offering times the number of shares outstanding immediately
prior to the offering) for the

8
<PAGE>

Corporation shall be not less than $100 million and the net proceeds to the
Corporation are not less than $15 million.

(ii) Vote or Consent of Holders. Each share of Series A Preferred
--------------------------
Stock and each share of Series B Preferred Stock shall automatically be
converted into shares of Common Stock and Non-Voting Common Stock, respectively,
at its then effective Conversion Price upon the vote or written consent to so
convert of the holders of a majority of the shares of Convertible Preferred
Stock then outstanding taken together as a single class.

(iii) Notice. All holders of record of shares of Convertible
------
Preferred Stock will be given at least ten (10) days' prior written notice of
the date fixed and the place designated for mandatory conversion of all of such
shares of Convertible Preferred Stock. On the date fixed for conversion,
subject to Section A(II)(f)(3), all rights with respect to the Convertible
Preferred Stock so converted will terminate except only the rights of the
holders thereof, upon surrender of their certificate or certificates therefore,
to receive certificates for the number of shares of Common Equity into which
such Convertible Preferred Stock has been converted. Such notice will be sent
by mail, first class, postage prepaid, to each record holder of shares of
Convertible Preferred Stock at such holder's address appearing on the stock
register. On or before the date fixed for conversion each holder of shares of
Convertible Preferred Stock shall surrender his or its certificate or
certificates for all such shares to the Corporation at the place designated in
such notice, and shall thereafter receive certificates for the number of shares
of Common Equity to which such holder is entitled pursuant to this Section
A(II)(f).

(3) Accrued and Unpaid Dividends Upon Conversion. Upon any
--------------------------------------------
conversion of Convertible Preferred Stock, the holders of such Convertible
Preferred Stock shall be entitled to receive all accrued and unpaid dividends on
such Convertible Preferred Stock in shares of Common Equity, the number of which
shares of Common Equity shall be determined by dividing the amount of such
accrued and unpaid dividends by the Conversion Price then in effect.

(4) Conversion Price. (i) The initial conversion rate for the
----------------
Convertible Preferred Stock shall be one (1) share of Common Equity for each one
share of Convertible Preferred Stock surrendered for conversion, representing an
initial Conversion Price of $9.58 per share of the Corporation's Common Equity.
The applicable conversion rate and Conversion Price from time to time in effect
is subject to adjustment as provided in Section A(II)(g) hereof.

(ii) Whenever the conversion rate and Conversion Price shall be
adjusted as provided in Section A(II)(g) hereof, the Corporation shall forthwith
file at each office designated

9
<PAGE>

for the conversion of Convertible Preferred Stock, a statement, signed by the
President and any Vice President or Treasurer of the Corporation, showing in
reasonable detail the facts requiring such adjustment and the conversion rate
that will be effective after such adjustment. The Corporation shall also cause a
notice setting forth any such adjustments to be sent by mail, first class,
postage prepaid, to each record holder of Convertible Preferred Stock at his or
its address appearing on the stock register.

(iii) Upon any conversion, no adjustment to the conversion rate shall
be made for accumulated and unpaid dividends on the Convertible Preferred Stock
surrendered for conversion or on the Common Equity delivered.

(5) Conversion Mechanics. (i) In order to exercise the conversion
--------------------
privilege, the holder of any Convertible Preferred Stock to be converted shall
surrender his or its certificate or certificates therefor to the principal
office of the transfer agent for the Convertible Preferred Stock (or if no
transfer agent is at the time appointed, then the Corporation at its principal
office), shall give written notice to the Corporation at such office that the
holder elects to convert the Convertible Preferred Stock represented by such
certificates, or any number thereof. Such notice shall also state the name or
names (with address) in which the certificate or certificates for shares of
Common Equity which shall be issuable on such conversion shall be issued,
subject to any restriction on transfer relating to shares of the Convertible
Preferred Stock or shares of Common Equity upon conversion thereof. If so
required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly authorized in writing. In respect of
all optional conversions, the date of receipt by the transfer agent (or by the
Corporation if the Corporation serves as its own transfer agent) of the
certificates and notice shall be the conversion date. As soon as practicable
after receipt of such notice and the surrender of the certificate or
certificates for Convertible Preferred Stock as aforesaid, the Corporation shall
cause to be issued and delivered at such office to such holder, or on his or its
written order, a certificate or certificates for the number of full shares of
Common Equity issuable on such conversion in accordance with the provisions
hereof and cash as provided in paragraph (ii) of this section in respect of any
fraction of a share of Common Equity otherwise issuable upon such conversion.

(ii) The Corporation shall not issue fractions of shares of Common
Equity upon conversion of Convertible Preferred Stock or scrip in lieu thereof.
If any fraction of a share of Common Equity would, except for the provisions of
this paragraph (ii), be issuable upon conversion of any Convertible Preferred
Stock, the Corporation shall in lieu thereof pay to the person

10
<PAGE>

entitled thereto an amount in cash equal to the current value of such fraction
as determined by the Board of Directors.

(iii) The Corporation shall at all times when the Convertible
Preferred Stock shall be outstanding reserve and keep available out of its
authorized but unissued stock, for the purposes of effecting the conversion of
the Convertible Preferred Stock, such number of its duly authorized shares of
Common Equity as shall from time to time be sufficient to effect the conversion
of all outstanding Convertible Preferred Stock. Before taking any action which
would cause an adjustment reducing the conversion price below the then par value
of the shares of Common Equity issuable upon conversion of the Convertible
Preferred Stock, the Corporation will take any corporate action which may, in
the opinion of its counsel, be necessary in order that the Corporation may
validly and legally issue fully-paid and nonassessable shares of such Common
Equity at such adjusted conversion price.

(iv) All shares of Convertible Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall forthwith cease and terminate except
only the right of the holder thereof to receive shares of Common Equity in
exchange therefor.

(g) Anti-dilution Provisions. (1) In order to prevent dilution of the
------------------------
rights granted hereunder, the Conversion Price shall be subject to adjustment
from time to time in accordance with this paragraph (g)(1). At any given time
the Conversion Price, whether as the initial Conversion Price ($9.58 per share)
or as last adjusted, shall be that dollar (or part of a dollar) amount the
payment of which shall be sufficient at the given time to acquire one share of
the Corporation's Common Equity upon conversion of shares of Convertible
Preferred Stock. Upon each adjustment of the Conversion Price, the record
holder of shares of Convertible Preferred Stock shall thereafter be entitled to
acquire upon exercise, at the Conversion Price resulting from such adjustment,
the number of shares of the Corporation's Common Equity obtainable by
multiplying the Conversion Price in effect immediately prior to such adjustment
by the number of shares of the Corporation's Common Equity acquirable
immediately prior to such adjustment and dividing the product thereof by the
Conversion Price resulting from such adjustment.

(2) Except as provided in paragraph (g)(3) or (g)(6) below, if and
whenever on or after the date of initial issuance of the Convertible Preferred
Stock (the "Initial Issuance Date"), the Corporation shall issue or sell, or
shall in accordance with subparagraphs (g)(2)(i) to (viii), inclusive, be deemed
to have issued or sold any shares of its Common Equity for a consideration per
share less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then

11
<PAGE>

forthwith upon such issue or sale (the "Triggering Transaction"), the Conversion
Price shall, subject to subparagraphs (i) to (viii) of this section, be reduced
to the Conversion Price (calculated to the nearest tenth of a cent) determined
by dividing:

(A) an amount equal to the sum of (x) the product derived by
multiplying the Number of Common Shares Deemed Outstanding immediately
prior to such Triggering Transaction by the Conversion Price then in
effect, plus (y) the consideration, if any, received by the Corporation
upon consummation of such Triggering Transaction, by

(B) an amount equal to the sum of (x) the Number of Common Shares
Deemed Outstanding immediately prior to such Triggering Transaction plus
(y) the number of shares of Common Equity issued (or deemed to be issued in
accordance with subparagraphs (g)(2)(i) to (viii)) in connection with the
Triggering Transaction.

For purposes of this Section (g), the term "Number of Common Shares
Deemed Outstanding" at any given time shall mean the sum of (x) the number of
shares of the Corporation's Common Equity outstanding at such time, (y) the
number of shares of the Corporation's Common Equity issuable assuming conversion
at such time of the Corporation's Convertible Preferred Stock and (z) the number
of shares of the Corporation's Common Equity deemed to be outstanding under
subparagraphs (g)(2)(i) to (viii), inclusive, at such time.

For purposes of determining the adjusted Conversion Price under this
paragraph (g)(2), the following subsections (i) to (viii), inclusive, shall be
applicable:

(i) In case the Corporation at any time shall in any manner
grant (whether directly or by assumption in a merger or otherwise) any
rights to subscribe for or to purchase, or any options for the purchase of,
Common Equity or any stock or other securities convertible into or
exchangeable for Common Equity (such rights or options being herein called
"Options" and such convertible or exchangeable stock or securities being
herein called "Convertible Securities"), whether or not such Options or the
right to convert or exchange any such Convertible Securities are
immediately exercisable and the price per share for which the Common Equity
is issuable upon exercise, conversion or exchange (determined by dividing
(x) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the
exercise of all such Options, plus, in the case of such Options which
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or

12
<PAGE>

sale of such Convertible Securities and upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Equity
issuable upon the exercise of such Options or the conversion or exchange of
such Convertible Securities) shall be less than the Conversion Price in
effect immediately prior to the time of the granting of such Option, then
the total maximum amount of Common Equity issuable upon the exercise of
such Options or in the case of Options for Convertible Securities, upon the
conversion or exchange of such Convertible Securities shall (as of the date
of granting of such Options) be deemed to be outstanding and to have been
issued and sold by the Corporation for such price per share. No adjustment
of the Conversion Price shall be made upon the actual issue of such shares
of Common Equity or such Convertible Securities upon the exercise of such
Options, except as otherwise provided in subparagraph (iii) below.

(ii) In case the Corporation at any time shall in any manner
issue (whether directly or by assumption in a merger or otherwise) or sell
any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Equity is issuable upon such conversion or exchange
(determined by dividing (x) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration,
if any, payable to the Corporation upon the conversion or exchange thereof,
by (y) the total maximum number of shares of Common Equity issuable upon
the conversion or exchange of all such Convertible Securities) shall be
less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then the total maximum number of shares of Common
Equity issuable upon conversion or exchange of all such Convertible
Securities shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been issued and sold by
the Corporation for such price per share. No adjustment of the Conversion
Price shall be made upon the actual issue of such Common Equity upon
exercise of the rights to exchange or convert under such Convertible
Securities, except as otherwise provided in subparagraph (iii) below.

(iii) If the purchase price provided for in any Options referred
to in subparagraph (i), the additional consideration, if any, payable upon
the conversion or exchange of any Convertible Securities referred to in
subparagraphs (i) or (ii), or the rate at which any Convertible Securities
referred to in subparagraph (i) or (ii) are convertible into or
exchangeable for Common Equity shall change at any time (other than under
or by reason of provisions designed to protect against dilution of the type
set forth in paragraphs (g)(2) or (g)(4)), the Conversion

13
<PAGE>

Price in effect at the time of such change shall forthwith be readjusted to
the Conversion Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold. If the purchase
price provided for in any Option referred to in subparagraph (i) or the
rate at which any Convertible Securities referred to in subparagraphs (i)
or (ii) are convertible into or exchangeable for Common Equity, shall be
reduced at any time under or by reason of provisions with respect thereto
designed to protect against dilution, then in case of the delivery of
Common Equity upon the exercise of any such Option or upon conversion or
exchange of any such Convertible Security, the Conversion Price then in
effect hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Security never been
issued as to such Common Equity and had adjustments been made upon the
issuance of the shares of Common Equity delivered as aforesaid, but only if
as a result of such adjustment the Conversion Price then in effect
hereunder is hereby reduced.

(iv) On the expiration of any Option or the termination of any
right to convert or exchange any Convertible Securities, the Conversion
Price then in effect hereunder shall forthwith be increased to the
Conversion Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination,
never been issued.

(v) In case any Options shall be issued in connection with the
issue or sale of other securities of the Corporation, together comprising
one integral transaction in which no specific consideration is allocated to
such Options by the parties thereto, such Options shall be deemed to have
been issued without consideration.

(vi) In case any shares of Common Equity, Options or Convertible
Securities shall be issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor. In case any shares of Common
Equity, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be the fair value of such
consideration. In case any shares of Common Equity, Options or Convertible
Securities shall be issued in connection with any merger in which the
Corporation is the surviving corporation, the amount of consideration
therefor shall be deemed to be the fair value of such portion of the net
assets and business of the non-surviving corporation as shall be
attributable to such

14
<PAGE>

Common Equity, Options or Convertible Securities as the case may be.

(vii) The number of shares of Common Equity outstanding at any
given time shall not include shares owned or held by or for the account of
the Corporation, and the disposition of any shares so owned or held shall
be considered an issue or sale of Common Equity for the purpose of this
paragraph (g)(2).

(viii) For purposes of this paragraph (g)(2), in case the
Corporation shall take a record of the holders of its Common Equity for the
purpose of entitling them (x) to receive a dividend or other distribution
payable in Common Equity, Options or in Convertible Securities, or (y) to
subscribe for or purchase Common Equity, Options or Convertible Securities,
then such record date shall be deemed to be the date of the issue or sale
of the shares of Common Equity deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or
the date of the granting of such right or subscription or purchase, as the
case may be.

(3) In the event the Corporation shall declare a dividend upon the
Common Equity (other than a dividend payable in Common Equity covered by
subparagraph (g)(4)) payable otherwise than out of earnings or earned surplus,
determined in accordance with generally accepted accounting principles,
including the making of appropriate deductions for minority interests, if any,
in subsidiaries (herein referred to as "Liquidating Dividends"), then as soon as
possible after the conversion of any Convertible Preferred Stock, the
Corporation shall pay to the person converting such Convertible Preferred Stock
an amount equal to the aggregate value at the time of such exercise of all
Liquidating Dividends (including but not limited to the Common Equity which
would have been issued at the time of such earlier exercise and all other
securities which would have been issued with respect to such Common Equity by
reason of stock splits, stock dividends, mergers or reorganizations, or for any
other reason). For the purposes of this paragraph (g)(3), a dividend other than
in cash shall be considered payable out of earnings or earned surplus only to
the extent that such earnings or earned surplus are charged an amount equal to
the fair value of such dividend as determined in good faith by the Board of
Directors of the Corporation.

(4) In case the Corporation shall at any time subdivide its
outstanding shares of Common Equity into a greater number of shares or, in case
the Corporation shall declare a dividend or make any other distribution upon the
stock of the Corporation payable in Common Equity, Options or Convertible
Securities, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Equity of

15
<PAGE>

the Corporation shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.

(5) If any capital reorganization or reclassification of the capital
stock of the Corporation, or consolidation or merger of the Corporation with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common
Equity shall be entitled to receive stock, securities, cash or other property
with respect to or in exchange for Common Equity, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of the Convertible
Preferred Stock shall have the right to acquire and receive upon conversion of
the Convertible Preferred Stock, which right shall be prior to the rights of the
holders of Common Equity (but after and subject to the rights of holders of
Preferred Stock senior to the Convertible Preferred Stock, if any), such shares
of stock, securities, cash or other property issuable or payable (as part of the
reorganization, reclassification, consolidation, merger or sale) with respect to
or in exchange for such number of outstanding shares of the Corporation's Common
Equity as would have been received upon conversion of the Convertible Preferred
Stock at the Conversion Price then in effect. The Corporation will not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument mailed or delivered to the holders of the Convertible
Preferred Stock at the last address of each such holder appearing on the books
of the Corporation, the obligation to deliver to each such holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions,
such holder may be entitled to purchase. If a purchase, tender or exchange
offer is made to and accepted by the holders of more than 50% of the outstanding
shares of Common Equity of the Corporation, the Corporation shall not effect any
consolidation, merger or sale with the person having made such offer or with any
Affiliate of such person, unless prior to the consummation of such
consolidation, merger or sale the holders of the Convertible Preferred Stock
shall have been given a reasonable opportunity to then elect to receive upon the
conversion of the Convertible Preferred Stock either the stock, securities or
assets then issuable with respect to the Common Equity of the Corporation or the
stock, securities or assets, or the equivalent, issued to previous holders of
the Common Equity in accordance with such offer. For purposes hereof the term
"Affiliate" with respect to any given person shall mean any person controlling,
controlled by or under common control with the given person.

(6) The provisions of this Section (g) shall not apply to any Common
Equity issued, issuable or deemed outstanding under subparagraphs (g)(2)(i) to
(viii) inclusive: (i) to any person

16
<PAGE>

pursuant to any stock option, stock purchase or similar plan or arrangement for
the benefit of employees, consultants or directors of the Corporation or its
subsidiaries in effect on the Initial Issuance Date or thereafter adopted by the
Board of Directors of the Corporation, (ii) pursuant to options and warrants in
existence on the Initial Issuance Date, (iii) as a dividend on the Convertible
Preferred Stock, (iv) on conversion of the Non-Voting Common Stock into Common
Stock or (v) on conversion of the Convertible Preferred Stock.

(7) In the event that:

(i) the Corporation shall declare any cash dividend upon its
Common Equity, or

(ii) the Corporation shall declare any dividend upon its Common
Equity payable in stock or make any special dividend or other distribution
to the holders of its Common Equity, or

(iii) the Corporation shall offer for subscription pro rata to
the holders of its Common Equity any additional shares of stock of any
class or other rights, or

(iv) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, including any
subdivision or combination of its outstanding shares of Common Equity, or
consolidation or merger of the Corporation with, or sale of all or
substantially all of its assets to, another corporation, or

(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;

then, in connection with such event, the Corporation shall give to the holders
of the Convertible Preferred Stock:

(a) at least twenty (20) days prior written notice of the
date on which the books of the Corporation shall close
or a record shall be taken for such dividend,
distribution or subscription rights or for determining
rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up; and

(b) In the case of any such reorganization,
reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least twenty
(20) days prior written notice of the date when

17
<PAGE>

the same shall take place. Such notice in accordance
with the foregoing clause (i) shall also specify, in
the case of any such dividend, distribution or
subscription rights, the date on which the holders of
Common Equity shall be entitled thereto, and such
notice in accordance with the foregoing clause (ii)
shall also specify the date on which the holders of
Common Equity shall be entitled to exchange their
Common Equity for securities or other property
deliverable upon such reorganization, reclassification
consolidation, merger, sale, dissolution, liquidation
or winding up, as the case may be.

Each such written notice shall be given by first class mail, postage prepaid,
addressed to the holders of the Convertible Preferred Stock at the address of
each such holder as shown on the books of the Corporation.

(8) If at any time or from time to time on or after the Initial
Issuance Date, the Corporation shall grant, issue or sell any Options,
Convertible Securities or rights to purchase property (the "Purchase Rights")
pro rata to the record holders of any class of Common Equity of the Corporation
and such grants, issuances or sales do not result in an adjustment of the
Conversion Price under paragraph (g)(2) hereof, then each holder of Convertible
Preferred Stock shall be entitled to acquire (within thirty (30) days after the
later to occur of the initial exercise date of such Purchase Rights or receipt
by such holder of the notice concerning Purchase Rights to which such holder
shall be entitled under paragraph (g)(8)) and upon the terms applicable to such
Purchase Rights either:

(i) the aggregate Purchase Rights which such holder could
have acquired if it had held the number of shares of Common Equity
acquirable upon conversion of the Convertible Preferred Stock
immediately before the grant, issuance or sale of such Purchase
Rights; provided that if any Purchase Rights were distributed to
--------
holders of Common Equity without the payment of additional
consideration by such holders, corresponding Purchase Rights shall
be distributed to the exercising holders of the Convertible
Preferred Stock as soon as possible after such exercise and it
shall not be necessary for the exercising holder of the Convertible
Preferred Stock specifically to request delivery of such rights; or

(ii) in the event that any such Purchase Rights shall have
expired or shall expire prior to

18
<PAGE>

the end of said thirty day period, the number of shares of Common
Equity or the amount of property which such holder could have
acquired upon such exercise at the time or times at which the
Corporation granted, issued or sold such expired Purchase Rights.

(9) If any event occurs as to which, in the opinion of the Board of
Directors of the Corporation, the provisions of this Section (g) are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Series B Preferred Stock in accordance with the
essential intent and principles of such provisions, then the Board of Directors
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights as
aforesaid, but in no event shall any adjustment have the effect of increasing
the Conversion Price as otherwise determined pursuant to any of the provisions
of this Section (g) except in the case of a combination of shares of a type
contemplated in paragraph (g)(4) and then in no event to an amount larger than
the Conversion Price as adjusted pursuant to paragraph (g)(4).

(III) Series C Preferred Stock.
------------------------

The relative powers, preferences and rights of, and the
qualifications, limitations and restrictions granted to and imposed upon, the
Series C Preferred Stock are as follows:

(a) Designation. The series shall consist of 600,000 shares and shall
-----------
be known as the Series C Preferred Stock of the Corporation.

(b) Dividends. (1) The holders of each share of Series C Preferred
---------
Stock shall be entitled to receive, when and as declared by the Board of
Directors, out of any funds legally available therefor, dividends in cash at the
rate of nine percent (9%) per annum, payable quarterly on the last day of March,
June, September and December, commencing June 30, 1994. At the option of the
Corporation, dividends on the Series C Preferred Stock may be paid, instead of
in cash, on declaration of the Board of Directors, in additional shares of
Series C Preferred Stock. If a dividend is to be paid in additional shares, the
number of shares of Series C Preferred Stock to be issued in payment of the
dividend with respect to each outstanding share of Series C Preferred Stock
shall be determined by dividing the amount of the dividend that would have been
payable had such dividend been paid in cash by $100. To the extent that all or
any part of dividends consisting of additional shares of Series C Preferred
Stock would result in the issuance of a fractional share of Series C Preferred
Stock (which shall be determined with respect to the aggregate number of shares
of Series C Preferred Stock held of record by each holder) then the amount of
such fraction multiplied by $100 shall be paid in cash (unless there are not

19
<PAGE>

legally available funds with which to make such cash payment, in which event a
fractional share will be issued).

(2) Dividends on the Series C Preferred Stock shall be paid before
any dividends may be set apart for or paid upon the Common Equity or Junior
Stock in any year. All dividends declared upon the Series C Preferred Stock
shall be declared pro rata per share.

(3) Dividends on the Series C Preferred Stock shall accrue from April
16, 1996 (and as of such date there exists no accrued and unpaid dividends) and
shall be cumulative, whether or not in any fiscal year there shall be net
profits or surplus available for the payment of dividends in such fiscal year,
so that if in any fiscal year or years, dividends in whole or in part are not
paid upon the Series C Preferred Stock, unpaid dividends shall accumulate as
against the holders of the Junior Stock.

(4) For so long as shares of the Series C Preferred Stock remain
outstanding, the Corporation shall not pay any dividend upon the Junior Stock,
whether in cash or other property (other than shares of Junior Stock), or
purchase, redeem or otherwise acquire any such Junior Stock unless, in addition
to the payment of the dividend to the holders of the Series C Preferred Stock as
described above, the Corporation has redeemed all shares of Series C Preferred
Stock which it would theretofore have been required to redeem under Section
(III)(c) hereof.

(c) Mandatory Redemption. The Corporation shall redeem on the
--------------------
Redemption Date all outstanding shares of Series C Preferred Stock (to the
extent that such redemption shall not violate any applicable provisions of the
laws of the State of Delaware) at a price of One Hundred Dollars ($100) per
share, plus an amount equal to any and all dividends accrued and unpaid, but
without interest (the "Series C Redemption Price"). If the Corporation is
unable on the Redemption Date to redeem any shares of Series C Preferred Stock
then to be redeemed because such redemption would violate the applicable laws of
the State of Delaware then the Corporation shall redeem such shares as soon
thereafter as the restrictions precluding such redemption shall no longer be
applicable.

(d) Optional Redemption. At any time, the Corporation shall have the
-------------------
right at its option, and with the affirmative vote or written consent of the
holders of record of a majority of the shares of Series C Preferred Stock then
outstanding, to redeem as a whole, or from time to time in part, shares of
Series C Preferred Stock at the Series C Redemption Price.

(e) Voting Rights. Except as otherwise provided by law, the holders
-------------
of Series C Preferred Stock shall not be entitled to notice of, or to vote at,
any meeting of the

20
<PAGE>

stockholders of the Corporation nor to vote on any matter relating to the
business or affairs of the Corporation.

SECTION B: UNDESIGNATED PREFERRED STOCK

The Undesignated Preferred Stock may be issued from time to time as
herein provided in one or more series. The designations, relative rights,
preferences and limitations of the Undesignated Preferred Stock, and
particularly of the shares of each series thereof, may, to the extent permitted
by law, be similar to or differ from those of any other series. The Board of
Directors of the Corporation is hereby expressly granted authority, subject to
the provisions of this Article IV, to fix, from time to time before issuance
thereof, the number of shares in each series and all designations, relative
rights, preferences and limitations of the shares in each such series,
including, but without limiting the generality of the foregoing, the following:

(a) the designation of the series and the number of shares to constitute
each series;

(b) the dividend rate on the shares of each series, any conditions on which
and times at which dividends are payable, whether dividends shall be cumulative,
and the preference or relation (if any) with respect to such dividends
(including preferences over dividends on the Common Equity or any other class or
classes);

(c) whether the series will be redeemable (at the option of the Corporation
or the holders of such shares or both, or upon the happening of a specified
event) and, if so, the redemption prices and the conditions and times upon which
redemption may take place and whether for cash, property or rights, including
securities of the Corporation or another Corporation;

(d) the terms and amount of any sinking, retirement or purchase fund;

(e) the conversion or exchange rights (at the option of the Corporation or
the holders of such shares or both, or upon the happening of a specified event),
if any, including the conversion or exchange price and other terms of conversion
or exchange;

(f) the voting rights, if any (other than any voting rights that the
Undesignated Preferred Stock may have as a matter of law);

(g) any restrictions on the issue or reissue or sale of additional
Undesignated Preferred Stock;

(h) the rights of the holders upon voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the

21
<PAGE>

Corporation (including preferences over the Common Equity or any other class or
classes or series of stock);

(i) the preemptive rights, if any, to subscribe to additional issues of
stock or securities of the Corporation; and

(j) such other special rights and privileges, if any, for the benefit of
the holders of the Undesignated Preferred Stock, as shall not be inconsistent
with provisions of this Restated Certificate of Incorporation.

All shares of Undesignated Preferred Stock of the same series shall be
identical in all respects, except that shares of any one series issued at
different times may differ as to dates, if any, from which dividends thereon may
accumulate. All shares of Undesignated Preferred Stock of all series shall be
of equal rank and shall be identical in all respects except that any series may
differ from any other series with respect to any one or more of the
designations, relative rights, preferences and limitations described or referred
to in subparagraphs (a) to (j) inclusive above.

SECTION C: COMMON EQUITY

(a) Dividends. Subject to the preferences and other rights of the
---------
Preferred Stock as set out above, the holders of Common Equity shall be entitled
to receive dividends when and as declared by the Board of Directors out of funds
legally available therefor. Holders of shares of Common Stock and Non-Voting
Common Stock shall be entitled to share equally, share for share, in such
dividends, except that if dividends are declared which are payable in shares of
Common Stock or Non-Voting Common Stock, dividends shall be declared which are
payable at the same rate in both classes of stock and the dividends payable in
shares of Common Stock shall be payable to the holders of that class of stock
and the dividends payable in shares of Non-Voting Common Stock shall be payable
to the holders of that class of stock.

(b) Liquidation. In the event of any liquidation, dissolution or winding
-----------
up of the affairs of the Corporation, voluntary or involuntary, after payment or
provision for payment to the holders of Preferred Stock of the amounts to which
they may be entitled as set out above, the remaining assets of the Corporation
available to stockholders shall be distributed equally per share to the holders
of Common Equity irrespective of class.

(c) Voting Rights. Except as otherwise provided herein or by law, each
-------------
holder of Common Stock shall be entitled to one vote in respect of each share of
Common Stock held of record on all matters submitted to a vote of stockholders.
Except as otherwise provided by law, the holders of Non-Voting Common Stock
shall not be entitled to notice of, or to vote at, any meeting of the

22
<PAGE>

stockholders of the Corporation nor to vote upon any matter relating to the
business or affairs of the Corporation.

(d) Conversion of Non-Voting Common Stock. (1) Each share of Non-Voting
-------------------------------------
Common Stock shall be convertible into one fully paid and nonassessable share of
Common Stock at any time at the election of the holder thereof subject to the
condition that the holder thereof delivers to the Corporation, together with the
notice of election so to convert and the applicable stock certificates (as
described below), a certificate of such holder (a "Conversion Eligibility
Certificate") to the effect that (i) such holder is a person other than Warburg,
Pincus Investors, L.P. ("Warburg") or any affiliate (as defined in Rule 12b-2
promulgated under the Securities Exchange Act of 1934, as amended, and any
successor rule) of Warburg, or (ii) upon such conversion and after giving effect
thereto, such holder and all affiliates of such holder will collectively own
beneficially and of record no more than fifty percent (50%) of the then
outstanding shares of Common Stock. The Corporation or its transfer agent shall
rely on any such certificate as accurately setting forth the facts therein
stated, unless the Corporation has actual knowledge of the falseness of any such
statements of fact.

(2) In order to exercise the foregoing conversion privilege, a holder
of Non-Voting Common Stock shall surrender to the Corporation at its principal
offices, or to any transfer agent for the Corporation, a certificate or
certificates for Non-Voting Common Stock to be converted together with (i) a
Conversion Eligibility Certificate and (ii) a written notice to the Corporation
that such holder has elected to convert such shares, or, if less than all shares
represented by such certificate are to be converted, the portion of the shares
represented thereby to be converted. Such notice shall also state the name or
names (with addresses) in which the certificates for shares of Common Stock
issuable upon such conversion shall be issued. Non-Voting Common Stock shall be
deemed converted for all purposes including without limitation the taking of a
record date for a meeting of the stockholder of the Corporation, upon receipt by
the Corporation or its transfer agent of such certificates evidencing such
shares accompanied by a Conversion Eligibility Certificate and such notice of
election to convert.

(3) Upon conversion of any certificate evidencing Non-Voting Common
Stock which is converted in part only, the Corporation shall cause to be
executed and delivered to the holder thereof, at the expense of the Corporation,
a new certificate evidencing the balance of the Non-Voting Common Stock which
was not so converted.

(4) The Corporation shall not be required to issue or deliver any
certificate unless and until the holder of the shares so surrendered has paid to
the Corporation the amount of any tax

23
<PAGE>

which may be payable in respect of any transfer involved in such issuance or
shall establish to the satisfaction of the Corporation that such tax has been
paid.

(5) The Corporation shall at all times reserve and keep available out
of its authorized but unissued Common Stock the full number of shares of such
stock into which all shares of Non-Voting Common Stock from time to time
outstanding are convertible.

(6) Shares of Non-Voting Common Stock which are converted into shares
of Common Stock as provided in this Section shall not be reissued.

(e) Reclassifications. In the event of any stock split, combination or
-----------------
other reclassification of shares of Common Equity, each share of Common Equity
shall be treated equally; provided, that in any such transaction, only holders
--------
of Common Stock shall receive shares of Common Stock and only holders of Non-
Voting Common Stock shall receive shares of Non-Voting Common Stock.

(f) No Preemptive Rights. No holder of Common Equity of the Corporation
--------------------
shall, by virtue of this Certificate of Incorporation or Delaware law generally,
have any preemptive right to subscribe to any additional issue of stock of the
Corporation of any or all class or series thereof or to any security convertible
into such stock.

ARTICLE V

The Corporation is to have perpetual existence.

ARTICLE VI

In furtherance and not in limitation of the powers conferred by
statute, the By-Laws of the Corporation may be made, altered, amended or
repealed by the stockholders or by the Board of Directors.

ARTICLE VII

The Corporation shall indemnify any and all of its directors or
officers, including former directors or officers, and any employee, who shall
serve as an officer or director of any corporation at the request of
Corporation, to the fullest extent permitted under and in accordance with the
laws of the State of Delaware.

24
<PAGE>

ARTICLE VIII

Meetings of stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.

ARTICLE IX

A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the Director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after the
date of incorporation of the Corporation to authorize corporate action further
eliminating or limiting the personal liability of Directors, then the liability
of a Director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.

Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.

ARTICLE X

The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation, in any manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.

25
<PAGE>

IN WITNESS WHEREOF, said Corporation has caused this Certificate to be
signed by its Vice President and Chief Financial Officer, this 12th day of
September, 1996.

XOMED SURGICAL PRODUCTS, INC.

By: /s/ Thomas E. Timbie
-----------------------------
Name: Thomas E. Timbie
Title: Vice President and
Chief Financial
Officer

<PAGE>

EXHIBIT 3.2.2

XOMED SURGICAL PRODUCTS, INC.

INCORPORATED UNDER THE LAWS OF THE
STATE OF DELAWARE

RESTATED BY-LAWS
----------------

ARTICLE I

OFFICES.

Xomed Surgical Products, Inc. (the "Corporation") shall maintain a
registered office in the State of Delaware. The Corporation may also have other
offices at such other places, either within or without the State of Delaware, as
the Board of Directors may from time to time designate or the business of the
Corporation may require.

ARTICLE II

STOCKHOLDERS.

Section 1. Annual Meeting. The annual meeting of Stockholders for
--------------
the election of Directors and the transaction of any other business as may
properly come before such meeting shall be held on the last Monday of April of
each year, or as soon after such date as may be practicable, in such City and
State and at such time and place as may be designated by the Board of Directors,
and set forth in the notice of such meeting. If said day be a legal holiday,
said meeting shall be held on the next succeeding business day. At the annual
meeting any business may be transacted and any corporate action may be taken,
whether stated in the notice of meeting or not, except as otherwise expressly
provided by statute or the Restated Certificate of Incorporation.

Section 2. Special Meetings. Special meetings of the Stockholders
----------------
for any purpose may be called at any time by the Board of Directors, the
Chairman of the Board, or if no Chairman has been elected, by the President and
Chief Executive Officer, and shall be called by the Chairman of the Board or, if
none, by the President and Chief Executive Officer at the request of the holders
of thirty percent (30%) of the outstanding shares of capital stock entitled to
vote. Special meetings shall be held at such place or places within or without
the State of Delaware as shall from time to time be designated by the Board of
Directors and stated in the notice of such meeting. At a special meeting no
business shall be transacted and no corporate action shall be taken other than
that stated in the notice of the meeting.
<PAGE>

Section 3. Notice of Meetings. Written notice of the date, time and
------------------
place of any Stockholders' meeting, whether annual or special, shall be given to
each Stockholder entitled to vote thereat, by mailing the same to him at his
address as the same appears upon the records of the Corporation not less than
ten (10) nor more than sixty (60) days prior to the date of such meeting.
Notice of any adjourned meeting need not be given other than by announcement at
the meeting so adjourned, unless otherwise ordered in connection with such
adjournment. Such further notice, if any, shall be given as may be required by
law.

Section 4. Waiver of Notice. Notice of meeting need not be given to
----------------
any Stockholder who submits a signed waiver of notice, in person or by proxy,
whether before or after the meeting. The attendance of any Stockholder at a
meeting, in person or by proxy, without protesting prior to the conclusion of
the meeting the lack of notice of such meeting, shall constitute a waiver of
notice by him.

Section 5. Quorum. Any number of Stockholders, together holding at
------
least a majority of the capital stock of the Corporation issued and outstanding
and entitled to vote, who shall be present in person or by proxy at any meeting
duly called, shall constitute a quorum for all purposes except as may otherwise
be provided by law.

Section 6. Adjournment of Meetings. If less than a quorum shall
-----------------------
attend at the time for which a meeting shall have been called, the meeting may
be adjourned from time to time by a majority vote of the Stockholders present or
by proxy and entitled to vote thereat, without notice other than by announcement
at the meeting until a quorum shall attend. Any meeting at which a quorum is
present may also be adjourned in like manner and for such time or upon such call
as may be determined by a majority vote of the Stockholders present in person or
by proxy and entitled to vote thereat. At any adjourned meeting at which a
quorum shall be present, any business may be transacted and any corporate action
may be taken which might have been transacted at the meeting as originally
called.

Section 7. Voting. Each Stockholder entitled to vote at any meeting
------
may vote either in person or by proxy, duly appointed by instrument in writing
subscribed by such Stockholder and bearing a date not more than eleven (11)
months prior to said meeting, unless said proxy provides for a longer period.
The holders of Common Stock shall be entitled to one (1) vote in respect of each
share held, and the holders of shares of Series A Convertible Preferred Stock
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which such shares of Series A Convertible Preferred Stock are
convertible, on all matters submitted to a vote of shareholders. Except as
otherwise provided by law, in the Restated Certificate

-2-
<PAGE>

of Incorporation or in these By-laws, the holders of shares of Common Stock and
the holders of shares of Series A Preferred Stock shall vote together as a
single class. At all meetings of Stockholders, all matters, except as otherwise
provided by law, the Restated Certificate of Incorporation or these By-laws,
shall be determined by a majority vote of the Stockholders present in person or
by proxy and entitled to vote thereat. Except as otherwise provided by law, the
Restated Certificate of Incorporation or these By-laws, the holders of Non-
Voting Common Stock, Series B Convertible Preferred Stock and Series C
Redeemable Preferred Stock shall not be entitled to notice of, or to vote at,
any meeting of the stockholders of the Corporation nor to vote upon any matter
relating to the business or affairs of the Corporation.

Section 8. Action by Stockholders Without a Meeting. Whenever under
----------------------------------------
the General Corporation Law of Delaware Stockholders are required or permitted
to take any action by vote, such action may be taken without a meeting upon
written consent, setting forth the action so taken, signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
Corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded.

ARTICLE III

DIRECTORS.

Section 1. Number and Qualifications. The Board of Directors shall
-------------------------
consist initially of seven (7) Directors, and thereafter shall consist of such
number as may be fixed from time to time by resolution of the Board of
Directors. The Directors need not be Stockholders.

Section 2. Responsibilities. The general management of the affairs
----------------
of the Corporation shall be vested in the Board of Directors, which may delegate
to Officers, employees and to committees of three (3) or more Directors such
powers and duties as it may from time to time see fit, subject to the
limitations hereinafter set forth, and except as may otherwise be provided by
law.

Section 3. Election and Term of Office. The Directors shall be
---------------------------
elected by the Stockholders at the annual meeting of Stockholders. If the
election of Directors shall not be held on the day designated by the By-laws,
the Directors shall cause the same to be held as soon thereafter as may be
convenient. The Directors chosen at any annual meeting shall hold office except

-3-
<PAGE>

as hereinafter provided, until the next annual election and until the election
and qualification of their successors.

Section 4. Removal and Resignation of Directors. Any Director may be
------------------------------------
removed from the Board of Directors, with or without cause, by the holders of a
majority of the shares of outstanding stock entitled to vote at any special
meeting of the Stockholders called for that purpose, and the office of such
Director shall forthwith become vacant. Any Director may resign at any time.
Such resignation shall take effect at the time specified therein, and if no time
be specified, at the time of its receipt by the Chairman of the Board or if no
Chairman has been elected, by the President and Chief Executive Officer, or by
the Secretary. The acceptance of a resignation shall not be necessary to make
it effective, unless so specified therein.

Section 5. Filling of Vacancies. Any vacancy among the Directors,
--------------------
occurring from any cause whatsoever, may be filled by a majority of the
remaining Directors, though less than a quorum, provided, however, that the
-------- -------
Stockholders removing any Director may at the same meeting fill the vacancy
caused by such removal, and provided further, that if the Directors fail to fill
-------- -------
any such vacancy, the Stockholders may at any special meeting called for that
purpose fill such vacancy. In case of any increase in the number of Directors,
the additional Directors may be elected by the Directors in office prior to such
increase. Any person elected to fill a vacancy shall hold office, subject to
the right of removal as hereinbefore provided, until the next annual election
and until the election and qualification of his successor.

Section 6. Regular Meetings. The Board of Directors shall hold an
----------------
annual meeting for the purpose of organization and the transaction of any
business immediately after the annual meeting of the Stockholders, provided a
quorum is present. Other regular meetings may be held at such times as may be
determined from time to time by resolution of the Board of Directors.

Section 7. Special Meetings. Special meetings of the Board of
----------------
Directors may be called at any time by the Chairman of the Board of Directors,
if any, or by the President and Chief Executive Officer.

Section 8. Notice and Place of Meetings. Regular meetings of the
----------------------------
Board of Directors may be held without notice at such time and place as shall be
designated by resolution of the Board of Directors. Notice shall be required,
however, for special meetings. Notice of any special meeting shall be
sufficiently given if mailed to each Director at his residence or usual place of
business at least five (5) days before the day on which the meeting is to be
held, or if sent to him at such place by telegraph or cable, or delivered
personally or by telephone not later than 24 hours prior to the time at which
the meeting is to be held. No notice of the annual meeting shall be required if

-4-
<PAGE>

held immediately after the annual meeting of the Stockholders and if a quorum is
present. Notice of a meeting need not be given to any Director who submits a
signed waiver of notice before or after the meeting, nor to any Director who
attends the meeting without protesting the lack of notice prior thereto or at
its commencement.

Section 9. Business Transacted at Meetings. Any business may be
-------------------------------
transacted and any corporate action may be taken at any regular or special
meeting of the Board of Directors at which a quorum shall be present, whether
such business or proposed action be stated in the notice of such meeting or not,
unless special notice of such business or proposed action shall be required by
law.

Section 10. Quorum. A majority of the entire Board of Directors
------
shall be necessary to constitute a quorum for the transaction of business, and
the acts of a majority of the Directors present at a meeting at which a quorum
is present shall be the acts of the Board of Directors, unless otherwise
provided by law, the Restated Certificate of Incorporation or these By-laws. If
a quorum is not present at a meeting of the Board of Directors, a majority of
the Directors present may adjourn the meeting to such time and place as they may
determine without notice other than announcement at the meeting until enough
Directors to constitute a quorum shall attend. When a quorum is once present to
organize a meeting, it is not broken by the subsequent withdrawal of any
Directors.

Section 11. Action Without A Meeting. Any action required or
------------------------
permitted to be taken by the Board of Directors or any committee thereof may be
taken without a meeting if all members of the Board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents thereto by the members of the Board or committee shall
be filed with the minutes of the proceedings of the Board or committee.

Section 12. Participation By Telephone. Any one or more members of
--------------------------
the Board or any committee thereof may participate in a meeting of the Board or
such committee by means of a conference telephone or similar communications
equipment allowing all persons participating in the meeting to hear each other
at the same time. Participation by such means shall constitute presence in
person at a meeting.

Section 13. Compensation. The Board of Directors may establish by
------------
resolution reasonable compensation of all Directors for services to the
Corporation as Directors, including a fixed fee, if any, incurred in attending
each meeting, Nothing herein contained shall preclude any Director from serving
the Corporation in any other capacity, as an Officer, agent or otherwise, and
receiving compensation therefor.

-5-
<PAGE>

ARTICLE IV

COMMITTEES.

Section 1. Appointment of Committees. Committees, whose members are
-------------------------
to be Directors, may be appointed by the Board of Directors, which committees
shall hold office for such time and have such powers and perform such duties as
may from time to time be assigned to them by the Board of Directors or the
committee appointing them. Any member of such a committee may be removed at any
time, with or without cause, by the Board of Directors or the committee
appointing such committee. Any vacancy in a committee occurring from any cause
whatsoever may be filled by the Board of Directors or the committee appointing
such committee.

Section 2. Resignation. Any member of a committee may resign at any
-----------
time. Such resignation shall be made in writing and shall take effect at the
time specified therein, or, if no time be specified, at the time of its receipt
by the Chairman of the Board, if any, the President and Chief Executive Officer
or the Secretary. The acceptance of a resignation shall not be necessary to
make it effective unless so specified therein.

Section 3. Quorum. A majority of the members of a committee shall
------
constitute a quorum. The act of a majority of the members of a committee
present at any meeting at which a quorum is present shall be the act of such
committee. The members of a committee shall act only as a committee, and the
individual members thereof shall have no powers as such.

Section 4. Record of Proceedings. Each committee shall keep a record
---------------------
of its acts and proceedings, and shall report the same to the Board of Directors
when and as required by the Board of Directors.

Section 5. Organization, Meetings and Notices. A committee may hold
----------------------------------
its meetings at the principal office of the Corporation, or at any other place
upon which a majority of the committee may at any time agree. Each committee
may make such rules as it may deem expedient for the regulation and carrying on
of its meetings and proceedings.

Section 6. Compensation. The members of any committee shall be
------------
entitled to such compensation as may be established by resolution of the Board
of Directors.

-6-
<PAGE>

ARTICLE V

OFFICERS.

Section 1. Number. The Officers of the Corporation shall be a
------
President and Chief Executive Officer, a Secretary and a Treasurer, and such
Vice Presidents and other Officers as may be appointed in accordance with the
provisions of Section 3 of this Article V. The Board of Directors, in its
discretion, may also elect a Chairman of the Board of Directors.

Section 2. Election, Term of Office and Qualifications. The
--------------------------------------------
Officers, except as provided in Section 3 of this Article V, shall be chosen
annually by the Board of Directors. Each such Officer shall, except as herein
otherwise provided, hold office until the selection and qualification of his
successor. Any two or more offices may be held by the same person, except the
offices of President and Chief Executive Officer and Secretary.

Section 3. Other Officers. Other Officers, including, without
--------------
limitation, one or more Vice Presidents, Assistant Secretaries and Assistant
Treasurers, may from time to time be appointed by the Board of Directors, which
other Officers shall have such powers and perform such duties as may be assigned
to them by the Board of Directors or the Officer or committee appointing them.
All such Officers shall be corporate officers of the Corporation with the power
to bind the Corporation by acts within the scope of their authority.

Section 4. Removal of Officers. Any Officer of the Corporation may
-------------------
be removed from office, with or without cause, by a vote of a majority of the
Board of Directors.

Section 5. Resignation. Any Officer of the Corporation may resign at
-----------
any time. Such resignation shall be in writing and shall take effect at the
time specified therein, and if no time be specified, at the time of its receipt
by the Chairman of the Board, if any, the President and Chief Executive Officer
or the Secretary. The acceptance of a resignation shall not be necessary in
order to make it effective, unless so specified therein.

Section 6. Filling of Vacancies. A vacancy in any office shall be
--------------------
filled by the Board of Directors.

Section 7. Compensation. The compensation of the Officers shall be
------------
fixed by the Board of Directors, or by any committee upon whom such power may be
conferred by the Board of Directors.

Section 8. Chairman of the Board of Directors. The Chairman of the
----------------------------------
Board of Directors, if one is elected, shall be a Director and shall preside at
all meetings of the Board of

-7-
<PAGE>

Directors and of the Stockholders at which he shall be present. He shall have
power to call special meetings of the Stockholders or of the Board of Directors
at any time and shall have such power and perform such other duties as may from
time to time be assigned to him by the Board of Directors.

Section 9. President and Chief Executive Officer.
-------------------------------------

The President and Chief Executive Officer shall have responsibility for the
general direction of the business affairs and property of the Corporation, and
of its several Officers, and shall have and exercise all such powers and
discharge such duties as usually pertain to the office of President and Chief
Executive Officer. He shall have responsibility for the day-to-day affairs of
the Corporation, subject to the control of the Board of Directors. He shall
perform such duties as may be assigned to him from time to time by the Board of
Directors and shall, in the absence of the Chairman of the Board, perform and
carry out the functions of the Chairman of the Board.

Section 10. Secretary. The Secretary shall attend all meetings of
---------
the Board of Directors and of the Stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for any committee appointed by the Board. He shall give or
cause to be given notice of all meetings of Stockholders and special meetings of
the Board of Directors and shall perform such other duties as may be prescribed
by the Board of Directors. He shall keep in safe custody the seal of the
Corporation and affix it to any instrument when so authorized by the Board of
Directors.

Section 11. Treasurer. The Treasurer shall have custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositaries as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board, taking proper vouchers for such disbursements, and shall render to
the President and Chief Executive Officer and Directors at the regular meetings
of the Board, or whenever they may require it, an account of all his
transactions as Treasurer and of the financial condition of the Corporation. He
may be required to give bond for the faithful discharge of his duties.

ARTICLE VI

CAPITAL STOCK.

Section 1. Issue of Certificates of Stock.
------------------------------

Certificates of capital stock shall be in such form as shall be approved by the
Board of Directors. They shall be numbered in the order of their issue, and
shall be signed by the Chairman of

-8-
<PAGE>

the Board of Directors, the President and Chief Executive Officer or any Vice
President, and by the Treasurer or any Assistant Treasurer or the Secretary or
any Assistant Secretary, and the seal of the Corporation or a facsimile thereof
shall be impressed, affixed or reproduced thereon. In case any Officer or
Officers who shall have signed any such certificate or certificates shall cease
to be such Officer or Officers of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates shall have
been delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as though
the person or persons who signed such certificate or certificates have not
ceased to be such Officer or Officers of the Corporation.

Section 2. Registration and Transfer of Shares. The name of each
-----------------------------------
person owning a share of the capital stock of the Corporation shall be entered
on the books of the Corporation together with the number of shares held by him,
the numbers of the certificates covering such shares and the dates of issue of
such certificates. The shares of stock of the Corporation shall be transferable
on the books of the Corporation by the holders thereof in person, or by their
duly authorized attorneys or legal representatives, on surrender and
cancellation of certificates for a like number of shares, accompanied by an
assignment of power of transfer endorsed thereon or attached thereto, duly
executed, and with such proof of the authenticity of the signature as the
Corporation or its agents may reasonably require. A record shall be made of
each transfer. The Board of Directors may make other and further rules and
regulations concerning the transfer and registration of certificates for stock.

Section 3. Lost, Destroyed and Mutilated Certificates. The holder of
------------------------------------------
any stock of the Corporation shall immediately notify the Corporation of any
loss, theft, destruction or mutilation of the certificates therefor. The
Corporation may issue a new certificate of stock in the place of any certificate
theretofore issued by it and alleged to have been lost, stolen or destroyed.
The Board of Directors may, in its discretion, require the owner of the lost,
stolen or destroyed certificate, or his legal representatives, to give the
Corporation a bond, in such sum not exceeding double the value of the stock and
with such surety or sureties as they may require, to indemnify it against any
claim that may be made against it by reason of the issue of such new certificate
and against all other liability in the premises, or may remit such owner to such
remedy or remedies as he may have under the laws of the State of Delaware.

-9-
<PAGE>

ARTICLE VII

DIVIDENDS AND SURPLUS.

The Board of Directors shall have power to fix and vary the amount to
be set aside or reserved as working capital of the Corporation, or as reserves,
or for other proper purposes of the Corporation, and, subject to the
requirements of the Restated Certificate of Incorporation, to determine whether
any part of the surplus or net profits of the Corporation shall be declared in
dividends and paid to the Stockholders, and to fix the date or dates for the
payment of dividends.

ARTICLE VIII

MISCELLANEOUS PROVISIONS.

Section 1. Fiscal Year. The fiscal year of the Corporation shall
-----------
commence on the first day of January and end on the last day of December.

Section 2. Corporate Seal. The corporate seal shall be in such form
--------------
as approved by the Board of Directors and may be altered at its pleasure. The
corporate seal may be used by causing it or a facsimile thereof to be impressed,
affixed or reproduced by the Secretary or Assistant Secretary of the
Corporation.

Section 3. Notices. Except as otherwise expressly provided, any
-------
notice required by these By-laws to be given shall be sufficient if given by
depositing the same in a post office or letter box in a sealed wrapper with
first class postage prepaid thereon and addressed to the person entitled thereto
at his address, as the same appears upon the books of the Corporation, or by
telegraphing or cabling the same to such person at such address; and such notice
shall be deemed to be given at the time it is mailed, telegraphed or cabled.

Section 4. Waiver of Notice. Any Stockholder or Director may at any
----------------
time, by writing or by telegraph or by cable, waive any notice required to be
given under these By-laws, and if any Stockholder or Director shall be present
at any meeting his presence shall constitute a waiver of such notice.

Section 5. Contracts, Checks, Drafts. The Board of Directors, except
-------------------------
as may otherwise be required by law, may authorize any Officer or Officers,
agent or agents, in the name of and on behalf of the Corporation to enter into
any contract or execute or deliver any instrument. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness issued
in the name of the Corporation, shall be signed by such Officer or Officers,
agent or agents of the

-10-
<PAGE>

Corporation, and in such manner, as shall be designated from time to time by
resolution of the Board of Directors.

Section 6. Deposits. All funds of the Corporation shall be deposited
--------
from time to time to the credit of the Corporation in such bank or banks, trust
companies or other depositaries as the Board of Directors may select, and, for
the purpose of such deposit, checks, drafts, warrants and other orders for the
payment of money which are payable to the order of the Corporation, may be
endorsed for deposit, assigned and delivered by any Officer of the Corporation,
or by such agents of the Corporation as the Board of Directors, the Chairman of
the Board, if any, or the President and Chief Executive Officer may authorize
for that purpose.

Section 7. Voting Stock of Other Corporations. Except as otherwise
----------------------------------
ordered by the Board of Directors, the Chairman of the Board, if any, or the
President and Chief Executive Officer shall have full power and authority on
behalf of the Corporation to attend and to act and to vote at any meeting of the
stockholders of any corporation of which the Corporation is a stockholder and to
execute a proxy to any other person to represent the Corporation at any such
meeting, and at any such meeting the Chairman of the Board, if any, or the
President and Chief Executive Officer or the holder of any such proxy, as the
case may be, shall possess and may exercise any and all rights and powers
incident to ownership of such stock and which, as owner thereof, the Corporation
might have possessed and exercised if present. The Board of Directors may from
time to time confer like powers upon any other person or persons.

Section 8. Indemnification of Officers and Directors. The
-----------------------------------------
Corporation shall indemnify any and all of its Directors or Officers, who shall
serve as an Officer or Director of this Corporation or of any other corporation
at the request of this Corporation, to the fullest extent permitted under and in
accordance with the laws of the State of Delaware.

ARTICLE IX

AMENDMENTS.

These By-laws may be amended or repealed, or new By-laws may be
adopted, at any annual or special meeting of the Stockholders, by vote of the
Stockholders entitled to vote in the election of Directors; provided, however,
-------- -------
that the notice of such meetings shall have been given as provided in these By-
laws, which notice shall mention that amendment or repeal of these By-laws, or
the adoption of new By-laws, is one of the purposes of such a meeting; and
provided, further, that By-laws adopted by the Stockholders shall not be
rescinded, altered, amended or repealed by the Board of Directors if such By-
laws adopted by the Stockholders so express. These By-laws may also be amended
or

-11-
<PAGE>

repealed, or new By-laws may be adopted, by the Board of Directors at any
meeting thereof; provided, however, that notice of such meeting shall have been
-------- -------
given as provided in these By-laws, which notice shall mention that amendment or
repeal of the By-laws, or the adoption of new By-laws, is one of the purposes of
such meeting; and provided further, that By-laws adopted by the Board of
-------- -------
Directors may be amended or repealed by the Stockholders as hereinabove
provided.

Dated: September 12, 1996

-12-

<PAGE>

EXHIBIT 10.11

FIFTH AMENDMENT AND WAIVER AGREEMENT
------------------------------------

FIFTH AMENDMENT AND WAIVER AGREEMENT (this "AGREEMENT") dated as of
September 3, 1996 by and among (1) Xomed Surgical Products, Inc., formerly known
as Merocel/Xomed Holdings, Inc. ("HOLDINGS"), (2) Merocel Corporation
("MEROCEL"), (3) Xomed, Inc., formerly known as Xomed-Treace, Inc. ("XOMED"),
(4) Xomed-Treace, P.R. Inc. ("XOMED P.R."), (5) TreBay Medical Corporation
("TREBAY" and, together with Holdings, Merocel, Xomed and Xomed P.R.,
collectively, the "BORROWERS" and each, singularly, a "BORROWER"), (6) Bank of
Boston Connecticut ("BKBCT"), The Chase Manhattan Bank (formerly known as
Chemical Bank), Bank of Scotland and Internationale Nederlanden (U.S.) Capital
Corporation as banks (collectively, the "BANKS" and individually, a "BANK"), and
(7) BKBCT as agent (the "AGENT") for the Banks, with respect to a certain Credit
Agreement dated as of April 15, 1994 by and among the Borrowers, the Banks and
the Agent, as amended by a certain First Amendment Agreement dated June 24,
1994, an Amendment and Waiver Agreement dated as of March 31, 1995, a Second
Amendment and Waiver Agreement dated as of July 3, 1995, a Third Amendment and
Waiver Agreement dated as of April 15, 1996, a Joinder Agreement dated as of
April 16, 1996 and a Fourth Amendment and Waiver Agreement dated as of June 7,
1996 (collectively, the "CREDIT AGREEMENT").

W I T N E S S E T H:
--------------------

WHEREAS, pursuant to the terms of the Credit Agreement, the Banks made
loans to the Borrowers; and

WHEREAS, the Borrowers have requested that the Banks and the Agent waive
certain provisions of the Credit Agreement and amend certain terms and
conditions of the Credit Agreement; and

WHEREAS, the Banks and the Agent are willing to waive certain provisions of
the Credit Agreement and amend certain terms and conditions of the Credit
Agreement on the terms and conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

(S)1. DEFINITIONS. Capitalized terms used herein without definition that
-----------
are defined in the Credit Agreement shall have the same meanings herein as
therein.

(S)2. RATIFICATION OF EXISTING AGREEMENTS. All of the Borrowers'
-----------------------------------
obligations and liabilities to the Banks and the Agent as evidenced by or
otherwise arising under the Credit Agreement, the Notes and the other Loan
Documents, are, by each Borrower's execution of this Agreement, ratified and
confirmed in all respects. In addition, by each Borrower's execution of this
Agreement, each Borrower represents and warrants that no counterclaim, right
of set-off or defense of any kind exists or is outstanding with respect to such
obligations and liabilities.
<PAGE>

-2-

(S)3. REPRESENTATIONS AND WARRANTIES; ACKNOWLEDGMENT. The Borrowers
----------------------------------------------
hereby represent and warrant to the Agent and the Banks as follows:

(a) Each has adequate power to execute and deliver this Agreement and
each other document to which it is a party in connection herewith and to perform
its respective obligations hereunder or thereunder. This Agreement and each
other document executed in connection herewith has been executed and delivered
by each Borrower and do not contravene any law, rule or regulation applicable to
any of them or any of the terms of any other indenture, agreement or undertaking
to which any of them is a party. The obligations contained in this Agreement and
each other document executed in connection herewith to which each is a party,
taken together with the obligations under the Loan Documents, constitute the
legal, valid and binding obligations enforceable against each Borrower, as the
case may be, in accordance with their respective terms.

(b) After giving effect to the transactions contemplated hereby, no
Event of Default under and as defined in any of the Loan Documents has occurred
and is continuing.

(c) All of the representations and warranties made by the Borrowers in
the Credit Agreement, the Notes and the other Loan Documents are true and
correct on the date hereof as if made on and as of the date hereof, except to
the extent of changes resulting from transactions contemplated or permitted by
the Credit Agreement and the other Loan Documents and changes occurring in the
ordinary course of business that singly or in the aggregate are not materially
adverse, and to the extent that any of such representations and warranties
relate expressly to an earlier date.

(S)4. WAIVERS. Subject to the satisfaction of the conditions set forth
-------
below, the Banks and the Agent waive those Events of Default set forth on
Schedule 1 attached hereto and made a part hereof. The waivers set forth above
- ----------
in this (S)4 shall be effective only for those Events of Default set forth on
Schedule 1 attached hereto and only for the periods set forth therein and such
- ----------
waivers shall not entitle the Borrowers to any future waiver in similar or other
circumstances. Without limiting the foregoing, upon the occurrence of an Event
of Default after the date set forth above, or if an Event of Default has
occurred and is continuing on the date hereof that is not set on Schedule 1, the
----------
Agent, upon the request of the Majority Banks, shall be free in its sole and
absolute discretion, so long as such Event of Default is continuing, to
accelerate the payment in full of the Borrowers' indebtedness to the Banks and
the Agent under the Credit Agreement and the other Loan Documents, and each Bank
and the Agent, with the consent of the Majority Banks, may proceed to enforce
any or all of such Bank's and the Agent's, as applicable, rights under or in
respect of the Credit Agreement, the Notes and the other Loan Documents and
applicable law.

(S)5. CONDITIONS PRECEDENT. The effectiveness of the waivers and amendments
---------- ---------
set forth herein shall be subject to the satisfaction on or before the date
hereof of each of the following conditions precedent:

(a) Representations and Warranties. All of the representations and
------------------------------
warranties made by the Borrowers herein, whether directly or incorporated by
reference, shall be true and correct on the date hereof, except as provided in
(S)3 hereof.
<PAGE>

-3-

(b) Delivery. The parties hereto shall have executed and delivered
--------
this Agreement in form and substance satisfactory to the Banks and the Agent.

(c) Amendment Fee. The Borrowers shall have paid to the Agent, for the
-------------
benefit of those Banks which consent to the transactions contemplated hereby on
or before September 3, 1996, an amendment fee in the amount of $44,922.50,
payable by the Agent to such Banks in an amount based upon each Bank's
percentage of the total Loans outstanding from Banks consenting to the
transactions contemplated hereby.

(S)6. AMENDMENTS TO THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS.
-----------------------------------------------------------

(a) Amendment to Schedule 2 of the Credit Agreement. The definition of
-----------------------------------------------
"Consolidated Operating Cash Flow" appearing in Schedule 2 of the Credit
----------
Agreement is hereby amended in its entirety to read as follows:

"Consolidated Operating Cash Flow. For any period, an amount
--------------------------------
equal to (a) the sum of (i) Earnings Before Interest and Taxes for
such period, plus (ii) depreciation, amortization and, with respect to
----
the fiscal quarters of the Borrowers ending June 29, 1996, September
28, 1996, December 31, 1996 and March 29, 1997 only, a one time non-
cash charge in the amount of $3,612,000 in connection with the write
off of TreBay's research and development expenses, plus (iii) with
----
respect to the fiscal quarters of the Borrowers ending June 29, 1996,
September 28, 1996, December 31, 1996 and March 29, 1997 only, one
time restructuring expenses in the amount of $3,093,000, less (b) the
----
sum of (i) cash payments for all taxes paid during such period, plus
----
(ii) Capital Expenditures made during such period to the extent
permitted hereunder; provided, that no Section 338 Event shall be
--------
included when calculating Consolidated Operating Cash Flow hereunder."

(b) Amendment to Schedule 2 of the Credit Agreement. The definition of
-----------------------------------------------
"Consolidated Financial Obligations" appearing in Schedule 2 of the Credit
----------
Agreement is hereby amended by adding the following to the end of such
definition:

"; provided, that such amount shall not include any payments of
--------
principal on the Term Loan that become due pursuant to (S)(S)4.3(b) and (c)
of this Credit Agreement."

(c) Amendment to Schedule 2 of the Credit Agreement. The definition of
----------
"Consolidated Shareholders Equity" appearing in Schedule 2 of the Credit
----------
Agreement is hereby amended by adding the following to the end of such
definition:

"; provided, further that such amount shall include the Series C
--------
Redeemable Preferred Stock of Holdings in all calculations of Consolidated
Shareholders Equity."

(d) Amendment to Schedule 2 of the Credit Agreement. The definition of
-----------------------------------------------
"Indebtedness" appearing in Schedule 2 of the Credit Agreement is hereby amended
----------
by adding the following to the end of such definition:
<PAGE>

-4-

"; provided, that in no event shall the Series C Redeemable Preferred
--------
Stock of Holdings constitute Indebtedness under this definition."

(e) Amendment to Section 10.1. Section 10.1 of the Credit Agreement is
-------------------------
hereby amended in its entirety to read as follows:

"(S)10.1 Operating Cash Flow to Financial Obligations.
-----------------------------------------------
Holdings will not permit the ratio of Consolidated Operating Cash Flow
to Consolidated Financial Obligations plus Distributions of Holdings
and its Subsidiaries (other than Distributions of up to $25,000,000
occurring on or before December 31, 1996 to redeem Preferred Stock) to
be less than (a) 1.10 to 1.0 for the period consisting of four
consecutive fiscal quarters of Holdings ending September 28, 1996 and
(b) 1.25 to 1.0 for any period consisting of four consecutive fiscal
quarters of Holdings ending on or after September 29, 1996."

(f) Amendment to Section 10.2. Section 10.2 of the Credit Agreement is
--------- -- ------- ----
hereby amended in its entirety to read as follows:

"(S)10.2 Interest Coverage. Holdings will not permit the
-----------------
ratio of (a) the sum of (i) Earnings Before Interest and Taxes of
Holdings and its Subsidiaries plus (ii) with respect to the fiscal
----
quarters of the Borrowers ending June 29, 1996, September 28, 1996,
December 31, 1996 and March 29, 1997 only, a one time non-cash charge
in the amount of $3,612,000 in connection with TreBay's research and
development expense and one time restructuring expenses in the amount
of $3,093,000, to (b) Consolidated Total Interest Expense of Holdings
and its Subsidiaries, to be less than (x) 2.5 to 1.0 for the period
consisting of four consecutive fiscal quarters of Holdings ending
September 28, 1996 and (y) 3.5 to 1.0 for any period consisting of
four consecutive fiscal quarters of Holdings ending on or after
September 29, 1996."

(g) Amendment to Section 13.1(r). Section 13.1(r) is hereby amended
----------------------------
in its entirety to read as follows:"

"(r) Warburg shall, at any time prior to an initial registered public
offering of Class A Voting Common Stock, legally and beneficially own
less than (i) thirty-six percent (36%) of the issued and outstanding
Class A Voting Common Stock of Holdings or (ii) sixty percent (60%) of
the issued and outstanding Preferred Stock of Holdings, in each case
as adjusted pursuant to any stock split, stock dividend or
recapitalization or reclassification of the capital of Holdings;"

(h) Amendment to Section 13.1(s). Section 13.1(s) is hereby amended
----------------------------
in its entirety to read as follows:

"(s) the Original Holdings Stockholders shall, at any time prior to
an initial registered public offering of Class A Voting Common Stock,
legally and beneficially own less than fifty one percent (51%) of the
issued and
<PAGE>

-5-

outstanding Voting Stock of Holdings, or adjusted pursuant to any
stock split, stock dividend or recapitalization or reclassification of
the capital of Holdings;"

(S)7. ADDITIONAL COVENANTS.
--------------------

Without any prejudice or impairment whatsoever to any of the Banks' and/or
Agent's rights and remedies contained in the Credit Agreement and the covenants
contained therein, the Notes or in any of the other Loan Documents, the
Borrowers additionally covenant and agree with the Banks and Agent as follows:

(a) The Borrowers shall comply and continue to comply with all of the
terms, covenants and provisions contained in the Credit Agreement, the Notes and
the other Loan Documents, except as such terms, covenants and provisions are
expressly modified by this Agreement upon the terms set forth herein.

(b) The Borrowers shall at any time or from time to time execute and
deliver such further instruments, and take such further action as the Agent
and/or Banks may reasonably request, in each case further to effect the purposes
of this Agreement, the Credit Agreement, the Notes and the other Loan Documents.

Each of the Borrowers expressly acknowledges and agrees that any failure by
any Borrower to comply with the terms and conditions of this (S)7 or any other
provisions contained in this Agreement shall constitute an Event of Default
under the Credit Agreement.

(S)8. EXPENSES.
--------

The Borrowers agree to pay to the Agent and the Banks upon demand (a) an
amount equal to any and all out-of-pocket costs or expenses (including
reasonable legal fees and disbursements and appraisal expenses) incurred or
sustained by the Agent and/or Banks in connection with the preparation of this
Agreement and related matters and (b) from time to time any and all out-of-
pocket costs or expenses (including commercial examiner fees and legal fees and
disbursements) hereafter incurred or sustained by the Agent and/or Banks in
connection with the administration of credit extended by the Banks and the Agent
to the Borrowers or the preservation of or enforcement of the Agent's and the
Banks' rights under the Credit Agreement, the Notes or the other Loan Documents
or in respect of any of the Borrowers' other obligations to the Banks and/or the
Agent.

(S)9. NO WAIVER BY BANKS AND/OR AGENT.
-------------------------------

Except as otherwise expressly provided for herein, nothing in this
Agreement shall extend to or affect in any way any of the Borrowers' obligations
or the Agent's or any Bank's rights and remedies arising under the Credit
Agreement, the Notes or the other Loan Documents, and neither the Agent nor any
Bank shall be deemed to have waived any or all of the Agent's and/or such Bank's
rights or remedies with respect to any Event of Default (other than an Event of
Default arising under the Credit Agreement as described in (S)4 hereof and then
only to the extent set forth in (S)4 hereof) or event or condition which, with
notice or the lapse of time, or both would become an Event of Default and which
upon the Borrowers' execution and delivery of this Agreement might otherwise
exist or which might hereafter occur.

(S)10. MISCELLANEOUS PROVISIONS.
------------------------
<PAGE>

-6-

(a) Except as otherwise expressly provided by this Agreement, all of the
respective terms, conditions and provisions of the Credit Agreement, the Notes
and the other Loan Documents shall remain the same. It is declared and agreed
by each of the parties hereto that the Credit Agreement, the Notes and the other
Loan Documents, each as amended hereby, shall continue in full force and effect,
and that this Agreement and the Credit Agreement, the Notes and the other Loan
Documents, as applicable, shall be read and construed as one instrument.

(b) This Agreement is intended to take effect under, and shall be construed
according to and governed by, the laws of the State of Connecticut.

(c) This Agreement may be executed in any number of counterparts, but all
such counterparts shall together constitute but one instrument. In making
proof of this Agreement it shall not be necessary to produce or account for
more than one counterpart signed by each party hereto by and against which
enforcement hereof is sought.

IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in its name and behalf by its duly authorized officer as of the
date first written above.

XOMED SURGICAL PRODUCTS, INC.
(formerly known as Merocel/Xomed
Holdings, Inc.)

By: /s/ Thomas E. Timbie
----------------------------
Its VP/CFO

MEROCEL CORPORATION

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary

XOMED, INC.
(formerly known as Xomed-Treace, Inc.

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary

XOMED-TREACE, P.R. INC.
<PAGE>

-7-

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary
<PAGE>

-8-

TREBAY MEDICAL CORPORATION

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary

BANK OF BOSTON CONNECTICUT,
Individually and as Agent

By: /s/ Garth J. Collins
----------------------------
Garth J. Collins
Its Vice President

THE CHASE MANHATTAN
BANK (formerly known as Chemical Bank)

By: /s/ Authorized Signatory
----------------------------

Its

BANK OF SCOTLAND

By: /s/ Authorized Signatory
----------------------------
Its

INTERNATIONALE NEDERLANDEN
(U.S.) CAPITAL CORPORATION

By:____________________________

Its
<PAGE>

-9-

The undersigned Guarantors
acknowledge and accept the
foregoing and ratify and confirm
their obligations under their
Unlimited Guaranties:

MEROCEL FOREIGN SALES
CORP.

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary

XOMED INTERNATIONAL, INC.

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary

XOMED CANADA, INC.

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary

XOMED AUSTRALIA PTY LIMITED

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary
<PAGE>

-10-

XOMED U.K. LTD.

By: /s/ Authorized Signatory
----------------------------
Its

XOMED FRANCE, S.A.

By: /s/ Thomas E. Timbie
----------------------------

Its Secretary

XOMED DEUTSCHLAND, GMBH

By: /s/ Authorized Signatory
----------------------------
Its
<PAGE>

-11-

SCHEDULE 1
----------

Events of Default
-----------------

These Events of Default that arise as a result of the failure of the Borrowers
to comply with the following sections of the Credit Agreement:

1. (S)10.1 for the fiscal quarter of the Borrowers ending June 29, 1996.

2. (S)10.2 for the fiscal quarter of the Borrowers ending June 29, 1996.

These Events of Default that will arise as a result of the failure of the
Borrowers to comply with the following sections of the Credit Agreement:

1. (S)9.4 with respect to the redemption by Holdings of Preferred Stock in
the aggregate amount of up to $25,000,000, such redemption occurring
on or before December 31, 1996.

2. (S)9.9 with respect to the sale by Holdings of common stock of Holdings
in a registered public offering, the proceeds of which are to be
applied in accordance with the terms of (S)4.3(c) of the Credit
Agreement on or before December 31, 1996.

3. Amendments to Holdings 1996 Stock Option Plan that increased to 778,000
the number of shares of Class A Voting Common Stock reserved thereunder
and allowed for the grant of non-qualified stock options with an
exercise price of up to fifty percent (50%) less than the fair market
value of such stock.

<PAGE>

EXHIBIT 10.12

XOMED SURGICAL PRODUCTS, INC.

Mark K. Adams
135 Montauk Avenue
Stonington, Connecticut 06378

Re: Separation Agreement

Dear Mark:

This letter shall constitute the separation agreement (the
"Agreement") between you and Xomed Surgical Products, Inc. (the "Company").
Upon your execution of this Agreement and failure to revoke within the seven-day
period described in Section B.5 hereof, this Agreement shall replace all of the
provisions and terms of your Employment Agreement with the Company dated August
15, 1994. The effective date of this Agreement shall be the eighth day
following your execution of this Agreement (the "Effective Date"), provided you
have not revoked this Agreement prior to such date.

A. In consideration of your execution of this Agreement, on the
Effective Date:

1. All your Company Stock Options will fully vest as of the Effective
Date and, pursuant to the terms of the Company Stock Option Plan, you shall be
entitled to exercise such options until the earlier of (x) 180 days following
the closing of an initial public offering of shares of Common Stock of the
Company pursuant to a registration statement declared effective under the
Securities Act of 1933, as amended and (y) the third anniversary of the
Effective Date.

2. The Company shall pay you a non-reimbursable allowance of $25,000
for outplacement services, rent, telephone and associated expenses for office
space and secretarial services.

3. The Company shall pay you $16,900 in respect of all accrued but
unused vacation as of the date hereof.

4. The Company shall pay you the amount of $350,000, payable monthly
over three months beginning on the Effective Date, and $9,532. In the event you
have not repaid the Company $110,000 by the Effective Date in connection with
the sale of your house, the Company shall deduct $110,000 from the payments to
be made to you hereunder.

5. You shall be entitled to retain, at no cost, a computer (Macintosh
5300 CS) and the scheduler provided to you by the Company.
<PAGE>

6. Subject to paragraph B.3 below, your loan to the Company in the
amount of $300,007.42, together with all accrued interest thereon, shall be
forgiven.

7. The Company shall continue to provide you and your family with
medical benefits substantially similar to the medical benefits provided to you
immediately prior to the Effective Time; provided, however, that the Company
-------- -------
shall not be required to continue such coverage in the event you accept
employment with any corporation or other entity and such corporation or other
entity provides you and your family with medical benefits on terms substantially
similar to the medical benefits provided to you by the Company.

In addition to the foregoing, in consideration of your execution of
this Agreement, the Company shall pay you severance in the amount of $175,000
per year, payable monthly over two years beginning on the first day of the month
following the Effective Date; provided, however, that in the event you are
-------- -------
employed on a full-time basis by any corporation or other entity at any time
after the first anniversary of the Effective Date, the Company shall have no
obligation to pay you any portion of the severance payments described in this
paragraph from the date of such new employment (it being understood that the
Company shall have to pay you the amounts due under this paragraph for any cash
compensation received by you during the first year following the Effective
Date).

B. In consideration of the above-referenced payments, you agree as
follows:

1. For a period ending on the second anniversary of the Effective
Date, except with the prior written consent of the Company (which consent shall
not be unreasonably withheld) you shall not (whether as an officer, director,
owner, employee, partner or other direct or indirect participant) engage in any
Competitive Business. "Competitive Business" shall mean the manufacturing,
supplying, producing, selling, distributing or providing for sale of (A) any
product, device or instrument manufactured from or using polyvinal acetal (PVAC)
material or technology or (B) any eye, ear, nose or throat product, device or
instrument (x) of a type manufactured or sold by the Company or any of its
subsidiaries or (y) in clinical development sponsored by the Company or any of
its subsidiaries, in each case as of the Effective Date. For such period, you
shall also not interfere with, disrupt or attempt to disrupt the relationship,
contractual or otherwise, between the Company and any of its subsidiaries and
any customer, supplier, lessor, lessee or employee of the Company or any of its
subsidiaries. This paragraph shall apply in all parts of the world. However,
if the Company during the period has discontinued, sold, abandoned, or otherwise
stopped selling any product or product line it shall not be deemed a
"Competitive Business" as defined above.

-2-
<PAGE>

2. During the two-year period following the Effective Date, except
with the prior written consent of the Company, you will not, directly or
indirectly, employ, solicit for employment, or advise or recommend to any other
person that they employ or solicit for employment, any person employed at the
time by the Company or any of its subsidiaries.

3. In consideration of the payment made pursuant to Section A.6
above, on the Effective Date, you shall surrender to the Company all
certificates representing shares of preferred stock of the Company beneficially
owned by you (including certificates representing 9,563 shares of Series A
Convertible Preferred Stock and 2,074 shares of Series C Redeemable Preferred
Stock), duly endorsed or accompanied by other appropriate instruments of
transfer. In consideration of a certain portion of the payment made pursuant to
Section A.4 above, you shall use your best efforts to exercise the purchase
option under the lease in connection with the BMW car leased to the Company in
your possession by no later than May 29, 1996 and to effectuate the termination
of the Company's obligations under such lease.

4.(a) For a period of two years from the Effective Date, you shall
consult, assist and advise the Company on subjects in your area of expertise
relating to general management, business operations, current acquisitions,
product licensing activities and other matters ("Projects"). All Projects, if
any, for your services covered by this Agreement, will be identified for you by
James T. Treace, Chairman and Chief Executive Officer of the Company, or his
designee, based on a mutual agreement as to their nature and substance, and
taking into consideration your availability.

(b) Reasonable out-of-pocket expenses which you incur in the
performance of your services on Projects under this Agreement will be separately
reimbursed. Expenditures shall be promptly submitted for payment and documented
by invoices or receipts and relating to the specific Project assigned to you by
the Company for which the expense was incurred. Undocumented expense or
unrelated to assigned Company Projects will not be reimbursed.

(c) It is understood that during the course of your consulting you may
be exposed to material and information which is confidential to the Company.
All such material and information, whether tangible or intangible, made
available, disclosed or otherwise known to you as a result of your services
under this Agreement or by reason of your prior employment with the Company,
shall be considered the sole property of the Company, shall be used by you only
for the benefit of the Company during the term of the Agreement and shall not be
disclosed to others except with the Company's prior approval. This obligation
of confidentiality shall survive the termination of this Agreement. Upon
termination of this Agreement, you shall promptly return all material data and
documents which you may

-3-
<PAGE>

then have in your possession as a result of your services under this Agreement.

(d) It is understood that your status shall be that of independent
contractor and not of agent or employee of the Company. In this connection, you
will not, except as otherwise expressly set forth in this Agreement, be entitled
to any employee benefits from the Company as a result of this Agreement or the
services rendered under it.

5. You hereby waive any and all rights to sue the Company, and any
affiliates, parent-companies and subsidiaries, and their past, present and
future officers, directors, employees and agents based upon any act or event
occurring prior to the Effective Date. Without limitation, you specifically
release the Company from any and all claims based on discrimination under
federal anti-discrimination laws such as Title VII of the Civil Rights Act, the
Age Discrimination in Employment Act and any and all federal, state and local
laws. However, you are not giving up your right to appeal a denial of a claim
for benefits submitted under the medical, dental, life insurance or disability
income programs maintained by the Company, excepting any claims for benefits
under the Bristol-Myers Squibb Severance Plan. Further, you are not giving up
your right to file for unemployment insurance benefits at the appropriate time
if you so choose, and your signing of this release will not affect your rights,
if any, to coverage by Worker's Compensation insurance.

6. You will have twenty-one (21) days from the date you receive this
Agreement (including the release contained herein) to consider and sign. If you
do not sign and return this Agreement within such 21 day period, the Company
will consider your action a refusal to sign, and you will not be entitled to the
consideration described above. If you do sign this document, it will not be
effective for a period of seven days thereafter, during which time you can
change your mind and revoke your signature. To revoke your signature, you must
notify the Company in writing within seven days of the date you signed it. In
----------
the event you revoke your signature you will not be entitled to the
consideration described above.

Finally, you are reminded of the continuing nature of your obligation
to maintain in confidence and not to make use of information concerning the
Company's business or affairs of any nature that is not otherwise a matter of
public record. This obligation which you acknowledged and agreed to in the
agreement concerning confidentiality that you executed when your employment with
the Company began, continues after the termination of your employment.

-4-
<PAGE>

Please acknowledge your understanding of and agreement to the
provisions of this Agreement by signing and dating the statement below.

Sincerely,

/s/ James T. Treace
- --------------------------------
James T. Treace, Chairman of the
Board of Directors and C.E.O.
Xomed Surgical Products, Inc.

MY SIGNATURE BELOW ACKNOWLEDGES THAT I HAVE READ THE ABOVE, UNDERSTAND WHAT I AM
SIGNING, AND AM ACTING OF MY OWN FREE WILL. I UNDERSTAND THAT IF ANY PROVISION
OF THIS AGREEMENT IS FOUND TO BE INVALID OR UNENFORCEABLE, IT WILL NOT AFFECT
THE VALIDITY OR ENFORCEABILITY OF ANY OTHER PROVISION. I UNDERSTAND THAT THIS
AGREEMENT AND ITS TERMS REPLACE IN ALL RESPECTS THE TERMS AND CONDITIONS OF MY
EMPLOYMENT AGREEMENT, DATED AUGUST 15, 1994, WITH THE COMPANY. I FURTHER AGREE
THAT THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. THE
COMPANY HAS ADVISED ME TO CONSULT WITH AN ATTORNEY, AND I HAVE DONE SO, PRIOR TO
SIGNING THIS AGREEMENT.

SIGNATURE: /s/ Mark K. Adams DATE 5/10/96
------------------------------ ---------------
MARK K. ADAMS

-5-

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our reports dated June
19, 1996, May 31, 1996 and May 31, 1996 related to Xomed Surgical Products,
Inc., Xomed, Inc., and TreBay Medical Corporation, respectively, in Amendment
No. 1 to the Registration Statement and related Prospectus of Xomed Surgical
Products, Inc. for the Registration of 2,500,000 shares of its Common Stock.

ERNST & YOUNG LLP

Jacksonville, Florida
September 11, 1996